A support level is found beneath the current price of an instrument and tends to be where falling prices find a floor of support. This means the price is more likely to ‘bounce’ off this level rather than break through it.
A resistance level is found above the current price of an instrument, and acts as a ceiling for prices as they rise. The opposite of a support level, a resistance level means that the price is more likely to fall back from this level than break through it.
When support/resistance levels are broken, a breakthrough or bounceback typically takes place - until another support or resistance level is found.
Support and resistance levels are key factors for technical traders, because very often those are the levels at which they will open trades and look for bouncebacks or breakthroughs. While a bounceback is more probable than a breakthrough, the latter would be a signal that the market may reverse trends at least in the short-term.
Additionally, after a support level is broken, it becomes a new level of resistance. When a resistance level is broken, it becomes a level of support.
There’s a wide range of tools and analytical methods that help in identifying levels of support and resistance, which include:
Let’s focus on a few examples based on the list above:
Here we have a US500 chart, where a trend line has been formed. This trend line acted as a support level, not allowing the market to break below. In this example, traders will be confident that prices are likely to remain above this trend line support.
This example shows a Simple Moving Average applied on the Silver market. As you can see, the SMA initially acted as a significant level of resistance for the market, but once it was broken became a level of support.
This is an example on the USDCHF currency pair, where you can see that the highest top acted as a significant level of resistance. The market approached this level on four occasions, breaking it only with a shadow of a candlestick rather than with the full body indicating weakness.
In conclusion, there is a very wide variety of methods indicating levels of support and resistance, and to some extent technical analysis may be interpreted as the analysis of support and resistance levels.