Saturday, February 27, 2010
"Nifty has a support level of XXXX and has a Resistance at YYYY. If it goes down below XXXX then it has support at ZZZZ". You must have listened this type of talk everyday in the morning at breakfast before going to work if you watch business news.What is this support and resistance level for Nifty?
Support means getting help when you are falling and resistance means creating the condition of adversity. Same happens with movement of the prices of stock also. In technical analysis term at the price level where a large number of buyers comes into picture to check the level of falling stock that price is called support level. A resistance level is the price where large number of sellers comes so the supply increases and price appreciation is checked.
For example,in the above picture the movement of NIFTY since May 2009 has been plotted and different resistance and support are marked. Let's start at May 2009.
The index rises sharply to level A then falls a little to level K and goes up to the level B.
When it starts falling again the level K, which was the previous low, acts as a support.
Then it rises and faces the resistance at C here the next high level A acts as resistance level.
This does not mean that the index never cross the resistance or support level. If this were the case then life would have been much easier. Index crosses these levels frequently. Technical analysis helps in predicting the movement at certain times not always. So when the index starts to falling down and crosses the support level at K decisively it can go below to next lower level which we call next support level.
Once a support level is broken decisively it becomes a resistance level for further movement of price and vice-versa.The peak C acts as support level when prices starts falling from E since this level was broken decisively when moving up from level D to level E.
G acts as another level of resistance when the index reaches to I region where it tried two times to go beyond it but failed so G level has become a strong resistance level.