A Beginner’s Guide to Support and Resistance Lines

What are Support and Resistance Levels?

When looking at a stock chart, think of support and resistance lines as invisible floors and ceilings for a stock's price:

• Support (The Floor): This is a price level where a dropping stock tends to stop falling. It pauses here because buyers find the price attractive and step in to purchase the stock, keeping it from dropping further.
• Resistance (The Ceiling): This is a price level where a rising stock tends to stop climbing. It hits a wall because sellers think the price is high enough and start selling, capping the upward movement.

To help you find these levels, most charting platforms include an option to automatically see the main support and resistance lines. Below are the current support and resistance lines for Microsoft (MSFT) on TradeVision.io (my favorite charting software). You can see that support is established at $475 per share, with resistance at $510. You will also notice that recent price movement has fluctuated up and down between these levels.

How "Market Makers" Influence These Lines

Behind the scenes, big institutional traders called options dealers (or market makers) heavily influence these lines based on how they manage their risks:

• In a normal market (Positive Gamma): Dealers act as a stabilizing force. When a stock price drops toward a support line, dealers hedge their risk by buying shares, which pushes the price back up. When the stock rises toward a resistance line, they sell shares, which brings the price back down.
• In a volatile market (Negative Gamma): This dynamic works completely in reverse. Instead of stabilizing the price, dealers are forced to sell as the price drops and buy as it rises. This can lead to explosive price moves beyond the floor or ceiling.

Breaking Through the Lines

These boundaries are not permanent walls. Prices can break through them if the market has enough power:

• Momentum is Key: To break past a floor or a ceiling, a stock needs high trading volume and strong momentum. Without it, the price will get stuck or quickly bounce back the other way.
• The Floor-Ceiling Switch: If a stock successfully breaks through a resistance line (the ceiling) and stays consistently above it, that old ceiling often flips to become the new support line (the floor). Buyers will now look to defend that price if it drops back down.

Implications for Trading

For traders, the practical application for support and resistance levels is simple:

Look to buy when the price is close to the support floor where buyers and dealers usually step in and avoid buying near the resistance ceiling where selling pressure is likely to push the price back down.

Also, keep in mind that because these lines are tied to options activity, they can move as dealer positioning changes over time.