Resistance (Resistance Level)

What Is Resistance in Simple Terms?

A resistance level — often referred to simply as "resistance" — is a price above which a stock doesn't tend to rise over a given period of time. In other words, it is the presumed "ceiling" price of a particular stock over a certain period. Resistance is the opposite of support. A stock's support level is the price it tends not to drop below over a given period of time.
Stocks fluctuate in value constantly — some more so than others. The more a stock's price changes (and the greater the degree to which it changes), the more volatile it is. For a particular stock, price variance can be said to happen between support and resistance levels like a ball skipping between two invisible barriers. A stock's support and resistance levels can change over time as its price trends higher or lower over the long term.
You can think of a stock's resistance level as a straight line that connects two or more of its high points. On the off chance that a stock is trending up in price outside of short-term changes, its resistance line may be at an incline. In the event that a stock is trading down in price outside of short-term changes, its resistance line may be at a decline. Assuming neither is the case, its support line may be near-horizontal.
Note: Some traders just use horizontal lines to represent support and resistance, while others prefer to use diagonal lines, which represent changing support and resistance prices over time. Horizontal support and resistance lines are referred to as "static," while diagonal lines are referred to as "dynamic."

What Timeframe Should Be Used to Draw Resistance Lines?

Two different investors could draw two different resistance lines depending on the respective time frames each wishes to examine. A longer-term investor could take a gander at a security's price performance over several years when drawing a resistance line with the goal that they can identify a longer-term price ceiling near which they could wish to sell after holding for quite a while.
A shorter-term investor could take a gander at the same security's price performance over, say, three months when drawing a resistance line so they can identify a shorter-term price ceiling near which they could plan to sell after holding for a shorter time frame. Because these two investors have different objectives, they would draw different resistance lines on different graphs.

What Is a Support Level?

Support is the opposite of resistance. On the off chance that a stock's resistance level represents its theoretical price ceiling, its support level represents its theoretical price floor. It is the price a stock is unlikely to fall below over a given period of time. Like a resistance line, a support line can be horizontal, at an incline, or at a decline depending on the direction a stock's price is trending over the longer term.

Resistance Level Example: Boeing (NYSE: BA)

The image above features a graph of Boeing's stock price from 06/21/21 through 12/21/21. As may be obvious, the stock's price trended generally downward during this period. Dynamic resistance and support levels are illustrated with black lines. As may be obvious, during the period shown, Boeing's price didn't necessarily in all cases rise the whole way to resistance when it was going up, and it didn't necessarily in all cases fall the entire way to support when it was in decline.
This illustrates an important point, which is that these levels are theoretical and not even close to absolute. There is no guarantee that a stock will decline the whole way to its support level or rise the entire way to its resistance level over some random period. Therefore most traders who incorporate these concepts into their buying and selling decisions place sell orders a little bit below resistance and place buy orders a little bit above support — along these lines, these trades are more likely to execute.

What's the significance here When a Stock "Breaks Out?"

A "breakout" happens when a stock's price moves above an established resistance level or below an established support level — especially after not moving outside of these levels for quite a while. Breakouts are typically characterized by higher-than-common trading volume and might be triggered by the emergence of a piece of data that traders feel is relevant to a stock's value. Interestingly, when a breakout happens, a stock's old support level often becomes its new resistance level (or vice versa).

How Do Investors Use Resistance and Support Levels to Make Trading Decisions?

Different investors use resistance and support levels differently when going with trading choices, and some investors — especially those who prefer fundamental analysis to technical analysis — don't pay these theoretical price limits any brain whatsoever. That being said, any kind of investor could benefit from timing their buy and sell decisions based on a stock's proximity to a resistance or support line.
For example, a long-term value investor who has identified a stock they believe is undervalued could see that stock's once-year support level and hold on to buy until the stock nears that level in order to maximize their eventual gains. An investor who is bearish on a stock could hold on until that stock approaches resistance before shorting it or buying a put option on it. An informal investor or swing investor could draw very short-term (e.g., one week or even one day) support and resistance lines and buy and sell a stock likewise (multiple times) as it approaches these limits.

Resistance Levels and Technical Analysis

Resistance and support levels are closely tied to technical analysis, which is the process of examining a security's price movement and trading volume over time and utilizing these factors to make predictions that can illuminate trading decisions. In other words, resistance and support levels don't have anything to do with a stock's fundamentals.
Fundamental analysis, then again, involves examining company-specific metrics like cash flow and P/E ratio and company-specific qualitative factors like management ability and competitive advantage to determine whether a stock is undervalued or overvalued.
Resistance and support levels fall under the purview of technical analysis rather than fundamental analysis because they are based on trading prices and trading volume — not on the value, merit, sales, or prospects of a company.

Would it be a good idea for me to Wait to Sell a Stock Until It Reaches Its Resistance Level?

In a healthy market, most securities tend to go up in value over the long term. Hence, resistance might increase, so selling when a security reaches a previous resistance level could cause an investor to pass up extra gains.
Likewise, in a bear market, prices might trend downward in the longer term, resulting in a declining dynamic resistance line. In this case, it could be wise to sell at a price a little lower than the previous peak, as the stock may not reach that price again for quite a while.
Making predictions based on resistance and support is a long way from an exact science, so settling on buy and sell choices conservatively can be a decent strategy, especially for investors who are somewhat risk-averse.

Do Cryptocurrencies Like Bitcoin Have Resistance Levels?

Because cryptocurrencies like Ethereum and Bitcoin fluctuate in value and are used by numerous investors as trading instruments, numerous crypto investors really do use resistance and support lines to make buying and selling decisions like they would with a stock.

Highlights

• Resistance can visualized utilizing different technical indicators rather than simply drawing a line connecting highs.
• A resistance level represents a price point that an asset experiences experienced issues exceeding in the time period being considered.
• Applying trendlines to a chart can provide a more dynamic view of resistance.