Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Support

What it is:

In technical trading analysis, support is a lower limit in a price channel in which a security’s price tends to stay.

How it works (Example):

Price channels can slope up (indicating bullish sentiment) or down (indicating bearish sentiment); they don’t have to simply go “sideways.” The important geometric characteristic is that the resistance lines (which are the opposite of support lines; they are the upper limits of the price channel) and support lines are parallel, as shown in this price channel for ChevronTexaco (CVX). The channel lines themselves are often based on multiday moving averages or logarithmic scales that reflect price movements in percentage terms. However, technical trading is as much an art as it is a science, and so one technical trader’s price channel might be different from another’s.

When a stock’s price touches or goes below the support, this may signal a trend change, which is why the support level is very important to technical traders.

Why it Matters:

Price channels help tip traders off about trend changes in a stock or "unusual" activity when the price goes above or below the price channel lines (we call this a breakout). For example, a technical trader might buy when a stock hits the support level of an upward-sloping price channel; similarly, traders hope to be already out of a stock before it hits the support level on a downward-sloping price channel.