What does ‘testing support and resistance’ mean in the stock market?
In the stock market, “testing support and resistance” refers to when a stock’s price approaches or touches a previously established support or resistance level. These levels are considered key price points that tend to influence the stock’s future direction.
Testing Support and Resistance
Support levels are areas where the stock price has historically bounced back up, indicating strong buying interest at that level. When the price tests support, it suggests that buyers are stepping in to prevent the stock from falling further.
Resistance levels, on the other hand, are areas where the stock price has historically met selling pressure, causing it to stall or reverse direction. When the price tests resistance, it indicates that sellers are active at that level, and the stock may face difficulty breaking through.
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Testing support and resistance is a crucial aspect of technical analysis
Testing support and resistance is a crucial aspect of technical analysis, as it helps traders identify potential turning points in the stock’s price trend. A successful test of support may signal a potential rally, while a breakout above resistance could indicate further upside potential. Conversely, a failure to hold support could lead to further declines, and a break below resistance could signal a potential downtrend.
Traders closely monitor price action around support and resistance levels to make informed trading decisions. They may use these levels as entry points for new positions or as exit points for existing ones. The strength of these levels can also be assessed by the number of times the price has tested them in the past. A level that has been repeatedly tested and held is considered stronger than a level that has been breached easily.
While support and resistance levels are not foolproof indicators, they can provide valuable insights into the behavior of stock prices. By understanding the concept of testing support and resistance, traders can make more informed decisions about their trading strategies.
Testing support and resistance
Testing support and resistance in the stock market refers to the examination of specific price levels that have historically shown significance in influencing the movement of an asset’s price. Here’s a breakdown of these terms:
Support
Definition: Support is a price level at which a stock or market has historically had difficulty falling below. It is like a floor where the asset tends to stop declining and may even bounce back upwards.
Testing Support: When traders mention “testing support,” they are referring to a situation where the price of an asset approaches a known support level. Traders observe whether the support level holds, meaning the price bounces off it and starts moving higher again, or if it breaks down, suggesting potential further declines.
Resistance
Definition: Resistance is a price level at which a stock or market has historically had difficulty moving above. It acts as a ceiling, preventing the price from rising further.
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Testing Resistance
Similarly, when traders talk about “testing resistance,” they are describing a scenario where the price of an asset approaches a known resistance level. Traders watch to see if the resistance level is strong enough to prevent further upward movement, causing the price to reverse or stall.
Understanding these concepts is crucial for technical analysis, a method where traders use historical price data and chart patterns to make predictions about future price movements. Identifying and interpreting support and resistance levels help traders make informed decisions about entry and exit points, as well as potential trend reversals. It’s important to note that no level of support or resistance guarantees future price behavior, and market conditions can change.
Kevin George is an active trader of stocks, forex, commodities and crypto with over 15 years of market experience. He hold a master's degree in finance and mix microeconomic studies of company financials with a big-picture macroeconomic view.
Kevin earned a bachelor's degree from Robert Gordons University in Scotland. He returned later to earn his master's degree in finance.
Kevin has written for investopedia, Seekingalpha with his resume on Muckrack and LinkedIn