1. What is the support level and resistance level?

On the K-line chart, we see the stock price movement as a series of misaligned highs and lows, which represent significant breakpoints in the stock market.

In technical analysis, these highs and lows can be described in professional terms, the so-called support and resistance levels.

A support level refers to a strong demand at a price point or area that can support a stock price and stop it from falling back up. Buyer strength may increase when the share price falls to near the support level and selling pressure may weaken.

A resistance level is the opposite concept of a support level, which means that there is a strong supply at a price point or area that hinders the price of a stock, causing it to turn upside down. When the stock price rises to near the resistance level, selling pressure may increase and buyer power may weaken.

Support and resistance levels can be both static, such as a horizontal line or inclined trend line, or dynamic, such as a moving average (MA).

Second, psychological factors behind support and resistance

Investors can be roughly divided into three categories: many-headed, empty-headed, and bystanders.

Overhead refers to investors who have bought too much; short refers to investors who have sold empty; bystanders are investors who have closed positions off the field or have not decided whether to do much or empty.

Assume that the share price has gone through a period of turbulence and starts to bounce upwards from a certain support level. Imagine, what kind of psychological activity do the above three types of investors generate?

The bulls may feel that they are happy to move up, but regret that they bought less at the beginning. Therefore, if the movement falls back near the original support level, some bulls will consider an increase.

The empty-headed may have realized that they misjudged the direction of the market at first. Therefore, if the market falls back near the area where they sold short, some of the bearers will consider buying a close position.

Bystanders may find that there has been some upward momentum in the movement. Therefore, some bystanders will consider buying more if there is a more ideal arrival time next.

As a result, as all three types of investors want to “buy low”, there will be a degree of support once the share price falls back to near the original support level.

The support level and the resistance level have a mutual conversion relationship. That is, once the support level is broken, it can become a potential resistance level; vice versa.

In the above example, let's assume that the share price does not rise from the support level but falls. What about the situation?

In fact, it is not difficult to understand that there will be a reversal of the attitude of the many, the empty-headed and the bystanders. For example, Void may realize that it initially misjudged the direction of the market. Therefore, if the market next rebounds near the original support level, some bulls will consider selling the closing position, turning the original support into a potential resistance level.

Third, the main points of the battle

In real combat, the reliability of support and resistance levels is easily influenced by various factors. We can focus on the following points:

• Transaction Volume

Trading volume is an important factor in assessing support and resistance levels.

If a potential support or resistance level is formed accompanied by a high volume of trades, it usually means that the market recognizes this support or resistance level, and the price is more likely to bounce or fall back near that point.

• Initial test

Initial testing refers to a potential support or resistance after a period of time has passed and the price returns near that point for the first time to test its potential support or resistance.

In general, the results of the initial test may be relatively reliable. Because market participants are often more focused during initial testing, it is easier for everyone to come to a consensus.

• K-Line Form

Some important K-line shapes can provide important clues to potential support or resistance levels.

For example, this support tends to be more reliable when a bullish whale swallow pattern occurs at the same time as a potential support level. Similarly, this resistance level also tends to be more reliable when some bearish K-line patterns (such as shooting stars) occur at the same time as the potential resistance level.

In addition to K-line morphology, we can also follow some classic chart morphology and technical indicators for a chance to find more insights.

• Time Interval

We mentioned earlier that when market participants in these three categories of market participants tend to act in unison, they form a potential support or resistance level.

Then the problem is that over time, market participants gradually develop a different understanding of the support or resistance level, causing their actions to diverge. Therefore, it is generally believed that there is a degree of “shelf life” effect of support or resistance levels.

This content discusses technical analysis, and other approaches, including fundamental analysis, may provide different perspectives. The examples provided are for illustrative purposes only and do not reflect the expected results.

All investments involve risk, including the potential loss of principal, which cannot guarantee the success of any investment strategy.