Horizontal resistances and supports

The notion of supports and resistances is one of the key points of technical analysis. It is mainly based on the idea that buying and selling decisions are partly due, on both the individual and market levels, to psychological reasons.

Thus, thresholds effects can be very effective. A level is considered as a support if, every time a stock tries to break this threshold down, the stock does not achieve that and heads back up. If we take the example of Vivendi (cf. graph), we can see that the stock came on the 100 EUR level several times in April and May, therefore 100 can be considered as a support.

We also can find psychological levels on the upside, preventing the stock from rising above certain levels: they are then called resistances. We can for example identify a resistance in the 100 EUR area for Casino, as shown opposite.

However, these levels, once tested, can be crossed up or down and thus get the opposite function. For example, on the Alcatel stock, the 50 EUR was used to constitute a resistance. Still, it was finally crossed and turned into a support.

The existence of such figures is also due to the markets memory principle. Indeed, investors remind themselves of previous reversing points and are thus able, when approaching these levels, to act accordingly. These anticipations thus turn , and reinforce the strength of the threshold, support or resistance. In the support case, buyers are the ones recalling the previous situation and winning, while sellers outclass buyers in the resistance case.