John Lansing

Technical Analysis 101: Resistance and Support Levels

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Resistance Levels

Resistance levels work inversely to support, but just as simply.

Resistance points often occur after a stock makes a prolonged advance after an important news event, such as an optimistic earnings outlook or a successful new product launch.

As the stock rises, early investors sell their holdings as they reap the gains they anticipated, but many investors arrive to the party late and buy in at an already-inflated price. Then they are trapped, as the absence of new buyers leads to the stock's weakness at the high valuation, and its value begins to fall.

Then, every time the stock subsequently rallies to this level, those latecomers will sell their holdings to try and recoup losses, thus forming a resistance level.

The chart below shows that Wal-Mart (WMT) saw a $55 resistance level for much of 2008, but it then broke through that and found a new resistance level near the $57 mark.

For more help understanding chart patterns and analysis, see Technical Analysis 101.