The idea that drawing lines on a chart can make you money has been a matter of contention for years. Warren Buffett, Peter Lynch, and Benjamin Graham for example aren’t exactly fans of the idea. Instead, each has relied entirely on fundamental analysis to earn their famous fortunes.
Buffett once remarked, “I realized technical analysis didn’t work when I turned the charts upside down and didn’t get a different answer.”
Instead of focusing on solely on market momentum, all three simply focused on finding long-term value. And over time, it made all of them very wealthy.
But the fact remains that technical analysis works well.
And the key to its effectiveness lies entirely in its popularity among large audiences, and its gauge of overall momentum, fear and greed.
Let me ask you this.
If everyone continues to sell at a specific price on a chart over and over again, wouldn’t you question it and perhaps use it to your advantage?
Those wanting to make a great deal of money would.
Some of the most reliable indicators of potential selling and buying pressure can be uncovered with the understanding of support and resistance, or a price floor or ceiling.
When prices are falling to the floor, support represents the moment when buying begins to overwhelm selling and prices begin to bounce back. Conversely, when prices move to the ceiling, resistance is the point where selling begins to overwhelm buying and price increases begin to reverse.
You can identify support and resistance by studying charts.
Look for a series of low points when a stock continues to fall to a certain level, but then doesn’t fall any more. Typically, this is support. And when you find a stock that rises to a certain high, but rises no more, you have found resistance points.
The more times a stock bounce off support and resistance, the stronger these support and resistance lines become for technical analysis. If something repeats itself again and again, it becomes a stronger indicator of potential pivots at high or low points on a chart.