Support (Support Level)

What Is Support in Stock Trading?

A support level — often referred to simply as "support" — is a price below which a stock doesn't tend to fall over a given period of time. In other words, it is the presumed "floor" price of a particular stock — to the point that it is no longer. Support is the opposite of resistance. A stock's resistance level is the price it tends not to exceed over a given period of time.
Stocks fluctuate in value continually — some more so than others. The more a stock's price fluctuates, the more volatile it is. For a particular stock, price change happens between support and resistance levels like a ball bouncing between two invisible walls. A stock's support and resistance levels can change if a stock breaks out of its support-resistance channel.
Think of a stock's support level as a straight line that connects two or more of its low points. On the off chance that a stock is trending up in price outside of short-term vacillations, its support line may be at an incline. In the event that a stock is trading down in price outside of short-term changes, its support 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 Support Lines?

Two different investors could draw two different support lines depending on the respective time frames each wishes to examine. A longer-term investor could take a gander at a security price performance over five years when drawing a support line with the goal that they can identify a longer-term price floor near which they could wish to buy in assuming they plan to hold for a long period.
A shorter-term investor could take a gander at the same security's price performance over, say, six months when drawing a support line so they can identify a shorter-term price floor near which they would feel comfortable buying in on the off chance that they plan to hold for a shorter time frame (e.g., until the security near's its short-term resistance level). Because these two investors have different objectives, they would draw different support lines on different graphs.
An informal investor would probably take a gander at the shortest-term chart for a given security, as they would aim to use technical analysis to identify buy and sell flags each day, and potentially multiple times per day.

What Is a Resistance Level?

Resistance is the opposite of support. On the off chance that a stock's support level represents its theoretical price floor, its resistance level represents its theoretical price ceiling. It is the price a stock is unlikely to rise above over a given period of time. Like a support line, a resistance 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.

Support 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 support and resistance levels are illustrated with black lines. As may be obvious, during the period shown, Boeing's price didn't necessarily in all cases fall the entire way to support when it was in decline, and it didn't necessarily rise the whole way to resistance when it was going up.

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

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

Different investors use support and resistance levels differently when making trading decisions, and some investors — especially those who prefer fundamental analysis to technical analysis — don't pay these theoretical price limits any mind 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 support or resistance 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 accordingly (multiple times) as it approaches these limits.

Support Levels and Technical Analysis

Support and resistance levels are closely tied to technical analysis, which is the process of examining a security's price movement and trading volume over time and using these factors to make predictions that can inform trading decisions. In other words, support and resistance levels have very little 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 expertise and competitive advantage in order to determine whether a security is undervalued or overvalued.
Support and resistance levels fall under the umbrella 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.

Features

• Support levels can be visualized using different technical indicators or simply by drawing a line connecting the lowest lows for the period.
• The support level represents a price point that an asset struggles to fall below over a given time period.
• Applying trendlines or incorporating moving averages provides a more dynamic view of support.

FAQ

Do Cryptocurrencies Like Bitcoin Have Support Levels?

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

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

In a healthy market, most securities tend to go up in value over the long term. Hence, support might increase, so waiting to buy until a security reaches a previous support level may not be the best choice all of the time. Instead, choosing a buy-in price that is near yet above a previous support level might be a more realistic method for opening a position.