Glass Floors and Ceilings

We keep hearing the stock analysts using the terms support and resistance, everywhere and every now and then. When I heard those terms, I always wondered what these terms mean. Believe me, even after 6 months into the trading, I didn’t EXACTLY understood, what the heck Support and Resistance were.

One day I read an article some where in a trading newsletter. I don’t remember the name of the author of the article so it’s difficult to give a credit. It was an interesting articlle with the same heading “Glass Floors and Ceilings”. The author used the words Glass Floors and Ceilings to explain the meaning of Support and Resistance.

Support means a price level at which buying is strong enough to pull the prices UP. Resistance is just opposite of it, means, a price level where selling is strong enough to push the prices down.

Let’s look at a Support level as a Glass Floor. If you throw a ball at a floor, what does it do. It bounces UP. It comes down and then bounces again. And again. And when it has bounced enough, it rests on the floor. You might say it’s because of law of gravity. I would say it found SUPPORT on the floor level and hence, it bounced back.

In stock market, when prices of a stock or commodity are falling down, they hit a floor i.e. the prices would either hold there for some time or just hit and bounce back. Hence, SUPPORT is sort of a floor.

Now, consider Resistance as a ceiling. Leave a gas baloon in a room and till where can it go. To the roof or CEILING. The pressure of gas inside it, pushes it up but is not strong enough to push it through the Ceiling. It faces ‘resistance’ at the roof. In case of stocks, the Buying pressure or the Demand of that share or stock or commodity, pushes the prices up but only to a certain level.

Why the term GLASS?

Because glass can be broken.

Similarly, when stock prices hit a Support level multiple times, the glass Floor becomes weaker. Generally, if a Support level is hit 4th time, the support breaks and prices go further below. It might happen on 5th time. But if it doesn’t, then you can be sure, that is very very very….. strong support. So, any time when a stock price comes near that Support level, you can be more confident to buy it.

Reverse is true for Resistance!

But then, how come each analyst comes up with multiple Supports and Resistances. They say, if it breaks below 5000, it will find support at 4800. If it breaks that level, then next level will be 4500. If it holds at 4500 (support), then it will resistance at 4800 and then at 5000.

Once a stock breaks through a Support level, then that Support level becomes a Resistance. And if breaks above a Resistance, that Resistance level becomes a Support.

You can look at stock market as a building of multiple glass floors. Let’s say a building has 4 floors. Ground Floor(GF), First Floor, Second Floor and Third Floor. When you are at GF, the GF floor is your support and its ceiling is your Resistance. When you move up to First Floor, the ceiling (resistance) of Ground Floor becomes the floor (or your support) on Fisrt Floor. When you further move up to Second floor, first floor ceiling (resistance) will become your support (or floor) on second floor.

Now, think of above when you are moving down from the top floor to second floor to first floor and ground floor.

It’s that simple. Isn’t it!!!