Support Zones
An awareness of patterns associated with support zones (areas usually associated with previous trading ranges, in which prices find support against further decline) and resistance areas (areas that resist further price advance) enables investors to more accurately define the diition of significant market trends. Such patterns also suggest areas in which price reversals are likely to take place.
Stock market advances do not take place in a straight line. They generally take place in a steplike series of advance, flat or retracement period, further advance, another flat or retracement period, and so forth.
During bull markets, retracements tend to take place at increasingly higher levels. The series of rising low areas between rising peak readings defines market trend.
Suppose, for example, that a stock is trading at a high of $50 per share, having recently risen in price from $45. A certain number of traders who purchased at $ will take profits at $50, creating, in the process, some temporary weakness in t stock. The stock might then back down to a price level of perhaps $47 to $48. If the general trend for that issue is bullish, which is the case in an uptrend, the will be buyers at hand waiting for a some reaction from the $50 level to take positions. If the buyers are aggressive, they likely will step into the market quickly, taking positions in the $47 to $48 area. This $47 to $48 area might be taken as an area “support,” a zone in which buyers will take positions in that issue.
Prices then rise, crossing the previous high at $50 (a temporary resistance ar because there was previous selling in that zone) and rising to perhaps $53 or when a new round of profit taking takes place. If prices back down, they are likely to find support in the area of the old previous high-in this case, in the ar around $50.
Each rise, retracement, and new rise during 1999 left behind a sort of indentatia in the chart pattern-a scoop of sorb, which represented a potential support zone for the next market declme. During uptrends, ideal buying zones often develop within those scoops or pockets between earlier market declines and the most rece market peaks.