Support and resistance levels are one of the most important aspects of technical analysis. These levels are price points where the market will most likely reverse.
Support is a level or an area in the market where buying interest is strong enough to overcome selling pressure. Because of this, price usually reverses at this level when price goes down towards it.
Resistance is the opposite of support. Price usually reverses at this level when price goes up towards it. You can think of support as the floor and the resistance as the ceiling for price.
To make things easier, we’ll refer to points 1 and 3 as ‘Highs’, and 2 and 4 as ‘Lows’.
A resistance level is usually recognized by a previous high and a support level is usually recognized by a previous low. In the figure above, points 1 and 3 are both resistance levels and point 2 and 4 are both support levels.
In the figure above, you can see that the resistance level around point 2 acted as a resistance level for point 4, which caused the price to go down. Point 4 failed to exceed past point 2, which was the previous high. Price went down, breaking past point 3, which was previous support.
When a support level is broken, it tends to act as a resistance level next time price comes back to it. The same applies for a resistance level. If you look back to the previous example, you can see that point 6 acted as a resistance level for the previous support level.
A resistance level becomes a support level and a support level becomes resistance. Because of this, some traders will use the phrase ‘level’ to denote both support and resistance levels.
When price breaks through a support level and comes back to it to form a resistance, this is called a ‘retest’. The same is true when price breaks through a resistance level and comes back to rebound.
Retests often happen when price breaks structure. When price breaks out of a market pattern or level, it will often retest before continuing the direction. Another term for retest is called ‘pullback’.
The figure above shows various support and resistance levels. Price either reversed or broke through at these levels. You can see that when price breaks a support level, it comes back and retests to form a new resistance before continuing to the downside.