Charting & TA Ch7: Support, Resistance, and Trends Flashcards
What is a price Gap?
A price Gap is when he opening price for the day is higher than the previous day’s closing price, thus causing a gap in pricing.
A Gap shows up on the chart as a space between the trading range from one day to the next.
- A gap occurs when the opening price is above or below the previous closing price, with no trading activity in between.
- There are common gaps, breakaway gaps, runaway gaps, and exhaustion gaps.
- Common gaps tend to be partial gaps and occur on a more frequent basis due to normal trading activity.
What is a ‘Break Out’?
A ‘Break Out’ is where the stock breaks out above a prior resistance level.
Support
In a downtrend, prices fall because there is an excess of supply over demand. The lower prices go, the more attractive prices become to those waiting on the sidelines to buy the shares. At some level, demand that would have been slowly increasing will rise to the level where it matches supply. At this point, prices will stop falling. This is support.
Support can be a price level on the chart or a price zone. In any event, support is an area on a price chart that shows buyers’ willingness to buy. It is at this level that demand will usually overwhelm supply, causing the price decline to halt and reverse.
The longer the time period, the more significant the support or resistance.
Resistance
Resistance is the opposite of support. Prices move up because there is more demand than supply. As the prices move higher, there will come a point when selling will overwhelm the desire to buy. This happens for a variety of reasons. It could be that traders have determined that prices are too high or have met their target. It could be the reluctance of buyers to initiate new positions at such rich valuations. It could be for any other number of reasons. But a technician will clearly see on a price chart a level at which supply begins to overwhelm demand. This is resistance. Like support, it can be a level or a zone.
Once an area or “zone” of support or resistance has been identified, those price levels can serve as potential entry or exit points because, as the price reaches a point of previous support or resistance, it will do one of two things: bounce back away from the support or resistance level, or violate the price level and continue in its prior direction—until it hits the next support or resistance level.
The timing of some trades is based on the belief that support and resistance zones will not be broken. Whether the price is halted by or breaks through the support or resistance level, traders can “bet” on the direction of price and can quickly determine if they are correct. If the price moves in the wrong direction (breaks through prior support or resistance levels), the position can be closed at a small loss. If the price moves in the right direction (respects prior support or resistance levels), however, the move may be substantial.
The longer the time period, the more significant the support or resistance.
