Support and Resistance Levels
The battle between buyers (demand) and sellers (supply) is the key to price
movements. In technical analysis, it creates what we see as resistance and
support levels.
When
the price of an instrument reaches a level where supply overtakes demand, a
rise in price will hit the ceiling and begin to fall. A high in the price is left,
and resistance is created.
In
Simple words supports are a price level that the stock will not fall below and
resistance is a price level that the stock can’t seem to rise above. The longer
these levels hold, the more they become stabilized for an eventual breakout or
breakdown.
Breakouts forms when the resistance is finally surpassed as
buyers come in off the fence and short-sellers get buy to cover their shares.
A breakdown form when the support level finally cracks as sellers panic to unload their positions and short-sellers try to add to their positions in often on a spike in volume.
Divergence
patterns using indicators compared to prices use trend lines at the indicator
peaks and bottoms to visualize indicator support or resistance.
When
then the particular level is broken, it triggers a reaction in the price
charts. These are temporary support and resistance since indicators often
fluctuate, as time is a dynamic component.
The
MACD is often used for divergence signals using the oscillator peaks and
valleys compared to the price action
