Course Progress
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Support and Resistance: The Market's Floor and Ceiling
Chapter 3. Support and Resistance: The Market’s Floor and Ceiling
Price doesn’t move in a vacuum; it moves between levels where supply and demand reach an equilibrium. ==Support** is the “Floor” where buying interest is strong enough to overcome selling pressure. Resistance is the “Ceiling” where selling interest is strong enough to overcome buying pressure.==
1. Types of Barriers
Not all support and resistance (S/R) levels are created equal.
Categorizing S/R Levels
| Type | Description | Reliability |
|---|---|---|
| **Horizontal S/R** | Price levels that have stopped movements multiple times in the past. | Very High (Easy for everyone to see) |
| **Trendline S/R** | Diagonal lines connecting a series of Higher Lows (Uptrend) or Lower Highs (Downtrend). | Moderate (Subjective to how the line is drawn) |
| **Psychological S/R** | Round numbers like $100, $1,000, or $50,000. | High (Human brain loves round numbers) |
| **Dynamic S/R** | Moving Averages acting as a floating floor or ceiling. | High (Popular among trend followers) |
2. The Golden Rule: Role Reversal
One of the most important concepts in chart analysis is that once a level is broken, its role changes.
Price hits a ceiling multiple times and fails to break through
Price surges above the resistance level with high volume
Price drops back down to the old resistance level
The old ceiling now acts as a floor, confirming the upward trend
3. How to Draw Effective Trendlines
Trendlines are the most common way to visualize the market’s momentum. To draw a valid trendline:
- Select Two Points: Find two significant lows (for an uptrend) or two significant highs (for a downtrend).
- Look for the Third Touch: A trendline is only “Confirmed” once price touches it for the third time and bounces.
- The Steeper, the Weaker: Very steep trendlines are often unsustainable and prone to sharp breaks.
The Zone, Not a Line: S/R should be viewed as a Zone rather than a precise mathematical line. Markets are messy; prices often “overshoot” a level slightly before reversing.
4. Conclusion: Navigating the Map
Support and resistance levels are the ==“Landmarks on the Market Map.”== By knowing where the floors and ceilings are, you can avoid buying at the top or selling at the bottom. In the next chapter, we will learn how to use indicators to measure the strength of these levels.
📚 Prof. Sean’s Selected Library
- [Technical Analysis of Stock Trends] - Edwards & Magee: The foundational text for classical chart patterns and S/R.
- [The Art and Science of Technical Analysis] - Adam Grimes: A modern, data-driven look at how S/R zones behave.
- [Support and Resistance Simplified] - Michael Thomsett: A quick guide for mastering horizontal and diagonal levels.
Next time, we will explore ‘Practical Indicators’—learning how to use RSI and MACD to catch momentum shifts.