Support and resistance levels are a critical part of trend analysis because it can be used to make specific trading decisions and identify when a trend is about to reverse. For example, a trader might identify an upcoming support level and decide to start buying the stock as it approaches knowing that it will likely rebound higher. These levels both test and confirm trends and should be closely monitored by anyone using technical analysis. As long as the price remains between these two levels, the trend is likely to continue in the prevailing direction.
However, a break beyond support or resistance does not always indicate a reversal. For example, a breakout higher may be the start of a faster bullish trend and vice versa for a breakdown below trendline support. There are also instance of ‘false breakouts’ when a price may breakout higher on low volume and then fall back into a price channel.
Traders should be aware of support and resistance levels and avoid placing orders at these major points since they’re usually characterized by a lot of volatility. If you feel confident about making a trade near these levels, it’s important to avoid placing orders directly at the level since they are rarely reached. This is because the price never actually reaches the whole number, but rather, flirts with the levels before rebounding. Traders may also place stops or short selling orders around these levels to capitalize on a breakdown or breakout.