Investing in Philippines: Investing words of the day: Consolidation, Resistance Level, and Support Level

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Saturday, August 21, 2010

Investing words of the day: Consolidation, Resistance Level, and Support Level


source: http://www.telecoms.com/19550/

I know these words are way above our minds....as my friends would say "nosebleed".

But since we are in stock investing these terms cant be avoided, specially that most analyst would use these terms(even me I just got to know about these words lately), so here it goes from Investopedia.com:

Consolidation
In technical analysis, the movement of an asset's price within a well-defined pattern or barrier of trading levels. Consolidation is generally regarded as a period of indecision, which ends when the price of the asset breaks beyond the restrictive barriers. Periods of consolidation can be found in charts covering any time interval (i.e. hours, days, etc.), and these periods can last for minutes, days, months or even years. Lengthy periods of consolidation are often known as a base. 

The levels of resistance and support within the consolidation are created through the upper and lower bounds of the stock's price. Once the price of the asset breaks through the identified areas of support or resistance, volatility quickly increases and so does the opportunity for short-term traders to generate a profit.

Resistance or Resistance level
The price at which a stock or market can trade, but not  exceed, for a certain period of time. The stock or market stops rising because sellers start to outnumber buyers. 

Support or Support level
The price level which, historically, a stock has had difficulty falling below. It is thought of as the level at which a lot of buyers tend to enter the stock. If the price of a stock falls towards a support level it is a test for the stock: the support will either be reconfirmed or wiped out. It will be reconfirmed if a lot of buyers move into the stock, causing it to rise and move away from the support level. It will be wiped out if buyers will not enter the stock and the stock falls below the support.

Layman's explanation:


Consolidation is that period in which the stock price is within a range. The range is within the Resistance level which we could say the ceiling price and the Support level which is the floor price. This Consolation can be seen by looking at the Price chart of the stock for a certain period. If you look closely to all the upward spike and if it seems that they don't go beyond a certain price that price level is the resistance level. 

On the other hand if you observe the downward spikes or others call falling knives if there is a price that always stays to that level that is the support level. Consolidation is that area between the resistance and support levels, a period of indecision as Investopedia.com put it. If a price goes beyond resistance or below support, it is a signal a investor should look at to make short term profits.

Here is my simple analysis:
When a stock is nearing its Resistance level the number of sellers outnumber buyers meaning there is an oversupply, a lot of investors wants to sell their stocks while the price is high. Thus when such reaches the resistance level, the stock price starts to go down creating that upward spikes after the price went up. It is a signal to sell when it starts to go down. Be mindful that you should sell before the price goes below your acquisition cost. But when the stock price breaches or goes beyond the resistance level and it goes on rising, it is the best time to take profits but also be mindful up to where such will stay because there is a tendency of a sudden crash in price.

When the stock price nears the support level it is a signal to buy in a sense that the price is at its lowest and the tendency is the price to rise up because buyers are starting to buy. We can ride on the rise on the stock price and make short term profit. But when the price goes below further the support level it only means that the investing public is not interested in the stock thus it will lead to further decline.It is good to buy at such level only when the company is a company with sound fundamentals or one of the proven companies that could withstand such decline because it has reached its bottom price.

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