Sunday, April 22, 2012

Support and Technical Analysis

 Index of concepts
  1. Aa to Az
  2. Ba to Bz
  3. Ca to Cz
  4. Da to Dz  
  5. Ea to Ez
  6. Fa to Fz
  7. Ga to Gz
  8. Ha to Hz
  9. Ia to Iz
11. Ka to Kz
24. Xa to Xz

Subject: Investment Analysis

Chapter/Topic; Technical analysis


Concept Definition and Explanation

A support level is the price range at which the technical analyst would expect a substantial increase in the demand for a stock.
Support levels are an item of interest after there is a meaningful increase in the price of a stock and a correction is taking place due to profit taking by traders. The logic or argument for the emergence of support level is that some persons who did not buy during the first price increase, will get into the stock. Also short sellers who sold at that price, will cover the positions as no loss trades. Due to the short covering and fresh buying at support levels substantial demand emerges for the stock and the stock rebounds. 
Resistance level as a concept is similar to support level. At resistance level, an increase in the supply of stock is expected and hence a price reversal. A resistance level develops in respose to a price rise. As prices are going up from an earlier decline, they touch earlier peaks. At each peak there are some investors who bought the stock and experienced a decline in price. They now square off their transactions at no-loss positions. Hence a supply comes into the market at these levels. Similarly, some persons who did not short sell at this level earlier now do the short selling. Price levels at which substantial number of transactions take place act as strong resistance and support levels.
Reilly, Frank and Keith Brown, Investment Analysis and Portfolio Management, 7th Edition, Thomson-South Western, 2003



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