Support

Definition

The term support refers to a price point below which movement is impeded by the economic law of supply and demand.  A support price point is identified through many observations and typically occurs over an extended period.

Explanation

The downward price movement of a security or market will normally reach a point at which it demonstrates significant resistance to additional downward movement.  When the price of a security reaches this point, investors will purchase the security, thereby providing support and preventing a further decline in price.  If this occurs on a number of occasions over time, the support level is said to be confirmed.  If the price of a security falls below this support level, it will likely continue to decline until it reaches another support level.  Resistance is the converse of support, since it's a price point above which the law of supply and demand limits additional upward movement.

Support and resistance price points are associated with technical analysis of stocks, since the focus is more on price trends than the fundamental fiscal health of the company.  When a stock appears to be bound by support and resistance levels, technical analysts will adopt a strategy of buying a stock when it reaches its support price point and selling the stock when it reaches its resistance price point.

Related Terms

liquid market, resistance, leg, breakout, pin risk