Many stock chart programs today supply drawing tools that allow you to draw lines on the price area of the graph. Drawing a line connecting the most recent price tops on your stock chart can help you better see price resistance. Generally, the more times a stock turns back at a particular price level, the stronger resistance is.
If you plot the price of a stock on a chart, you may notice that at times the price consistently turns lower at a particular point. The price level where the stock consistently turns lower represents resistance. Price resistance can occur naturally in response to the economic law of supply, but it can also occur when there is a large seller in the market or as the result of self-fulfilling prophesy amongst stock traders.
Law of Supply
The economic law of supply states that the higher the price of a good or commodity, such as a stock, the more people are willing to sell and the less people are willing to buy. At the most basic level, stock prices rise when there are more buyers than sellers and prices fall when there are more sellers than buyers. Resistance then, is the price point where the number of willing sellers overwhelm the number of willing buyers, causing the price to turn lower.
Price resistance can occur as the result of market psychology. If a stock price has consistently reversed at a particular price level, stock traders may be inclined to sell when the stock returns to that level. This can create a self-fulfilling prophesy causing the price to once again turn back at the level where it has been turned back in the past.
Price resistance can also result if there are one or more large sellers in the market. Assume, for example, Warren Buffet owns 5 million shares of IBM stock and he instructs his broker to sell shares each time IBM rises to $100 per share. In this case, IBM is likely to turn lower each time it reaches $100 as Buffet's broker sells shares at that level.
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