In previous parts, we have explained how price and volume charts are plotted.
If you closely watch these charts for a reasonable period of time, you can spot several patterns.
For example, you may notice that a shares price refuses to fall further and bounces back from a specific level.
Similarly, a stock may find it difficult to cross a certain price level on the upside.
These points are known as supports and resistancesWhy it happens: Why do some levels act as supports or resistances These levels are not fixed by anyone but get formed over time by the actions of the market participants.
Suppose a stock was trading close to Rs 80, but suddenly falls to Rs 60.
Naturally, investors who lost the opportunity to sell it at Rs 80 will feel bad and would try to sell the stock if the price comes up to Rs 80 once again.
This increased selling pressure around Rs 80 explains why the previous tops usually act as resistance points in future.
You can see similar patterns playing out in Nifty Chart now.
For example, Nifty is facing lot of pressure close to its previous peak of 11,760 hit on August 2018 and is yet to go above it decisively(i.e.
Nifty is still trading below 11,760 levels).
Similarly, if the price bounces back to Rs 80, there will be another set of investors who would sulk for failing to buy it around Rs 60.
They will wait for an opportunity to buy the stock if the price slides to Rs 60 again.
This surge of buyers turn near the previous bottoms makes it support points in future.
This surge of buyers turn near the previous bottoms makes it support points in future.
Role reversal:Technical analysis theory says that once a support or resistance is broken, its role is reversed (ie the support becomes the resistance and the resistance becomes the support).
Role reversal also occurs because of the logic explained above.
For example, the investors who sold the stock close to the resistance will be in an awkward position once the price cuts through this level and will be waiting to buy it back once the price falls back to the previous resistance level, which is the new support level.
For example, you can see this role reversal has recently played out at Infosys Chart i.e.
the Rs 705 level, which acted as resistance in October and December 2018, has turned as support during March 2019.Technical analysis theory says that once a support or resistance is broken, its role is reversed Similarly, the investor who bought a stock close to the support thinking that it can only go up from that level will be bewildered to see the support getting breached and that he is at a loss.
He will now be eager to recover his money once the price comes back to the previous support level, which is the new resistance level.