Why does price reverse at resistance and Support price for stock

Support and Resistance are concepts used by technical analyst to predict the price movement of the instrument.

A support is level where the price which the instrument tends to stabilize on the downside and is expected to reverse direction in upward direction. Resistance is opposite of the support level meaning the price is more likely to "bounce" off this level rather than break through it.

Let us take the example of a stock, say ABC Bank. Support the current price of stock is Rs 425 and the results of ABC bank are declared which are exceeding the market expectation. The price of the stock will increase due to reason of higher demand from the purchaser of stock, i.e. they are willing to pay a greater price for purchasing the share. Suppose the price rises to Rs 500. At Rs 500, the demand for purchasing the stock may decrease as the buyer will feel the prices of the stock are on a higher side. The supply at this price is greater as more sellers will be keen to sell the stock at this price. So now the stock is feeling resistance to cross the price of Rs 500. This price of Rs 500 starts acting as resistance for the stock.

Since trade happens when expectation of buyer’s demand meets the seller’s supply, the prices tend to fall on reaching the resistance level. The price does tend to fall until a new equilibrium is attained. Again after a certain price, say at Price RS 400, the seller will not be inclined to sell stock, as they might feel the price is too low to sell the stock, although the demand for the stock will be higher as compared to the supply for the stock.

Since the supply for selling is low at this support, stocks usually takes a support at this level and tends to rise from this support price. Usually support and resistance can be tracked by trend line.

The support and resistance can be tracked for different time period. Let us understand this will buying apples. In the peak season, the price of apples remains in between Rs 50-80, Suppose the peak season lies for three months. The support and resistance price for apple will be Rs 50 and Rs 80 respectively for a medium term. In daily prices, the support/ resistance can be Rs 50-Rs 55. In the whole year, if the prices of the apples remain between Rs 40-120, These are the support and resistance for the long term.

Once an existing support or resistance level is broken, the system tends to find new levels for resistance and support. The support and resistance can be defined for different time durations as discussed above. Normally once a support or resistance is broken, the existing support acts as new resistance and vice versa.