Support and Resistance

The first thing you need to understand about the market is this :-
1) The price cannot go up forever ; and
2) The price cannot go down forever ;

The reason to this is because there will always be buyers and there will always be sellers. As a result, the market will move in a series of highs (peaks) and lows (troughs). The peaks and troughs are known as Resistance and Support.

When the market is on a downtrend, it will reach its lowest point (support). This is where the buying interest is strong enough to support the selling pressure to halt further decline in prices, at least temporarily. When the market reaches its Support level, the price will go up again until it reaches its highest peak (Resistance) again.

When the market is on an uptrend, it will reach its highest point (resistance). This is where the selling pressure is strong enough to resist the buying interests and therefore halt the upward movement in price for the time being. When the market reaches its Resistance level, the price will go down again until it reaches its lowest level (Support) again.

Due to the volatility of the market, you can have more than one Support and Resistance in a day.

The Support level reverses the downward movement in price to an upward movement and is a good time to buy.
The Resistance level reverses the uptrend to a downtrend and is a good time to sell.

To understand how this works, you can look at the following market update :-

On 19th October 2011, FKLI price opened at 1444 and closed at 1446.5 points. Support is at 1440 and Resistance is at 1449. If you short (sell) at 1449 and long (buy) at 1440, you would have gained 9 points which is RM450 (50 x 9 = 450). However, if you expected the price to go up and opened a long position at 1449, you would have made a loss of RM450.

For this week, the Support level is at around 1430 and the Resistance level is at around 1470. The difference is about RM2000 ie, 40pts x RM50.