What Is Resistance ?

Resistance is one of the foundational elements of technical analysis (along with its corollary–support). Resistance is a price or price zone above the current market that contains the upside movement of an asset. Resistance is where selling interest appears over time, blocking further upside progress.

What is Resistance

Resistance can be a single price point, such as the high of the day, or hourly high. Resistance can also be a zone, meaning an area several points wide. A resistance zone represents a test of the resistance level, which may be broken by a small amount, but ultimately turns back the price advance, leaving the resistance level essentially intact. It could also be interpreted to mean that there is even more supply around the resistance zone, potentially signaling a reversal lower.

Resistance can be found in any time frame of chart analysis, where a longer timeframe (daily or weekly) suggests a more important, multi-day resistance level, while a short-term chart (hourly, 30 minutes) may reveal only minor resistance (good for day-traders) .

MUST KNOW POINTS

A resistance level represents a price point or price zone that an asset has had trouble breaking above in the time period being considered.

A resistance level may be several points wide, due to multiple attempts to break above the resistance, potentially forming a resistance zone and sending prices lower.

Trendline analysis is a simple but powerful way to identify areas of resistance; while other mathematical methods are frequently used as well.

Resistance levels are important to identify for multiple reasons: where to place a stop for a short position; where to place a take profit order for a long position, and when to enter a long position on a break of resistance (a breakout trade).

How does Supply and Demand Affect Resistance?

Demand for an asset is what propels it higher over time, absorbing market supply along the way. Liquidity refers to the amount of total supply and demand at any given time. High liquidity is likely to limit the overall share price movement, while low liquidity may see prices move excessively, potentially making a gap. The source of the demand may be a piece of macroeconomic news, such as a comment from a Fed official or an earnings release. After a series of gains, however, the demand may eventually lessen or stop altogether, as in the ‘buying spree has ended,’ If the price forms a top, it now functions as a point or zone of resistance.

Supply can come from multiple sources, such as take-profit selling around a resistance point or zone. Another example is where option holders may want to defend their option positions by selling a lot of shares at a specific price point ahead of resistance. And of course, macro news may pull traders in to short the market for a specific stock or other asset if negative news emerges, leaving a resistance point behind in its wake.

Resistance is Made to be Broken

Using technical analysis, traders can identify a particular point or zone of resistance. That resistance zone is likely to be tested in the midst of an uptrend. If the trend and buying interest are sufficient to challenge a resistance point, traders may find that the resistance area breaks, bringing in yet more breakout buyers. Stop loss buy orders above the resistance area may also come in to play, bringing in yet another source of buying, and clearly breaking above the resistance.

After a resistance point has been overcome, it is not unusual to see sellers briefly test lower to the breakpoint to see if it holds. If it does, then traders are likely to conclude that the break of resistance is valid and that the upside is in play. This is an example of a broken resistance level turning into support. Known as the Polarity Principle, once resistance is broken, it becomes support, and vice versa. Whether it is now major or minor support depends on the time frame of the resistance. A break above a recent daily high is more bullish than a break of an hourly resistance point.

Identifying Resistance Levels with Trendlines

Trendlines are powerful tools to analyze a security’s historical price action and identify resistance levels.  Trendlines works both as support and resistance on multiple occasions, respecting the notion of polarity, that broken resistance becomes support and vice versa

How do I Identify Resistance Levels

Resistance levels can be identified through technical analysis of charts and the various tools that come with them. Among the favorite tools used to identify resistance levels are key highs, trendlines, moving averages (simple and exponential), Bollinger bands, and Ichimoku or Cloud charts.

How do I trade with resistance levels?

It depends on your position and view of the market, as resistance will eventually be broken at some point. An aggressive trader might go short from just below the resistance level, looking for a pullback or reversal lower, essentially speculating that the resistance will hold. That same trader would also likely place a stop buy order above the resistance zone in case it breaks . A breakout trader might jump in on the long side if the resistance area is breached. A trader who is long might want to place a take profit order to sell near to the resistance zone.

What is the Polarity Principle?

The Polarity Principle refers to the price phenomenon whereby once resistance is broken, it becomes support and vice versa. A break of a resistance zone will usually see a quick test of the breakout level to see if the break holds, or if it fails and reverses lower.

The Bottom Line

A resistance point or zone develops when prices are unable to move higher from that zone. Resistance levels can be found on short-term or long-term charts, with long-term resistance levels carrying more weight for the overall direction of the next move in the security. Resistance levels are identified by technical analysis or visual inspection, using such tools as trendlines, horizontal lines, moving averages, and Bollinger Bands.

From a trading perspective, resistance levels offer various trading opportunities. You may go with the flow and buy into a resistance zone, looking for a break higher, you might jump in on the long side after a breakout has occurred, or you could look to sell into the resistance zone, going short, holding the view that the resistance will hold and prices will turn lower. No matter your situation, once prices near a resistance zone, it’s time to take notice of the price action and subsequent opportunities.