Using Support and Resistance to Predict Price

Stocks move up and stocks move down. And like all things like bananas, price is ultimately determined by supply and demand. If demand goes up, the price goes up. If the supply goes up, the price goes down. If demand goes up and supplies goes down; well, let's just hope you bought plenty banana futures.

When a stock is in an uptrend or down trend, it can be said that the supply/demand equation is stable or not changing. And so, the stock continues on in that trend. But sooner or later, something is going to affect either supply or demand, or both, and cause that stock to change direction. These changes in the supply/demand equation are what cause support and resistance.

What's the Difference Between Support and Resistance
Support is a price level below the current price of a stock. So that it tends to keep a stock from moving downward through that level. Resistance is the exact opposite. It's a barrier above the current price of a stock, that tends to prevent a stock from moving up through that level.

Changes in Price
The interesting thing about past changes in the supply/demand equation, is that they tend to affect future change in the supply/demand equation. Armed with this knowledge, the trader can use this to predict future price movement of a stock or market. Simply draw a horizontal line across the chart, starting from a noticeable change in price direction, and you have established a level that might provide support or resistance.

You may be wondering is there a way to know the strength of that level? In other words, can I assume some price changes may affect future price movement more strongly than others? The answer is a resounding, yes! There are certain events in the history of a stock that tend to reinforce support or resistance. Here are some of those events:

• Changes in price with greater than average volume
  
• Multiple, unsuccessful attempts to move through a price level
  
• Gap-ups and Gap-downs

Trends and Patterns
Analyzing charts is an interesting art, there is some science mixed in, but there's even more psychology. That's because the markets are made up of millions of traders, people like you and me, that act as a mob. So your actually analyzing mob behavior. Sure, there are computers in the mix, doing programmed trades, but those computers were programmed by people, so they act like people to some degree as well.

Some say that the market is unpredictable because in it is completely random due to the wide variety of influencers, it's like chaos. But even with chaotic behavior there are patterns that emerge, and those patterns can be analyzed to predict with some degree of certainty, what may happen in the future. Also, there are trends that can be observed, that also provide a degree of order.

Trends are one of the more interesting aspects of analyzing charts, because you can draw lines along trend lines, and these lines will more often than not indicate levels of support and/or resistance. And like changes in price, the strength of these levels are usually determined by the same points listed above.

In the next few posts, I'll provide specific examples of how to identify trends, and how we can use those levels to predict future price movements. I'll also be posting various chart patterns that you should look for that indicate bullish and bearish trends, which will help you as well.