Reviewing Support & Resistance Lines

Resistance

Think of it as the ceiling in the room on a certain floor of a building with several stories. The stock goes up and down between the floor and the ceiling. Three historically high price points, if horizontal, make a resistance line. Historically, the stock bounces off this and heads back down until enough momentum is built up to break out and go "into the next story," where the resistance line becomes the support line (the floor in the room one story higher). The more price points that fall on the line, the stronger the line. (Always know where the 52-week highs are). Previous lows coming down and touching it are not as significant as highs going up and touching it. Stocks sometimes break out on strong volume "through the roof" and begin an up trend (like a rolling stock going up).

Support

Think of it as the floor in the room. Support should be drawn first. Three historically low price points, if horizontal, make a support line. Historically, the stock bounces off this and heads back up, unless momentum (demand) for it decreases and it breaks out and goes "into the next lower story, or the basement," where the support line becomes the resistance line (the ceiling in the basement). The more price points that fall on the line, the stronger the line. Previous highs coming up and touching it are not as significant as lows going down and touching it. 

Pivot Points

When a stock bounces up or down off of a support or resistance line.

Outrider Anomalies

These are drastically higher or lower price points that fall outside the normal Resistance and Support Lines for approximately one or two days. Don't count these when drawing Resistance and Support Lines.