I have seen these terms used and am wondering how much is actually a real thing vs finding patterns where there are none or that aren’t going to be predictive.
For instance from a recent article on Tesla:
“If the stock does not hold support around the $153 level, the upper bound of a consolidation range from October 2020, there is a risk of it dipping to the lower bound around $130.” https://www.google.com/amp/s/www.benzinga.com/amp/content/30088223
In: 0
They work until they don’t.
Basically investment people invented terms to help them better understand whats going on, and then they shared those terms with everyone to set a standard. Now a good chunk of investors react to those standard metrics in tandem because they were all taught what it’s supposed to mean when those metrics are hit. It’s useful for prediction purposes until someone or something doesn’t follow the rules, then its chaos and no one knows until the stock falls back into their predefined standards again.
Technical analysis (the mumbo jumbo about “support levels” and such) is essentially made up. Humans are *really* good at finding patterns in data, so much so that they tend to “find” patterns even when they don’t exist. All rigorous studies of stock movement show they’re all random walks around a slowly moving average, so “support levels” and “resistance levels” are basically after-the-fact data artifacts, not real.
HOWEVER…stock traders are people and people react to what they *think* is there, not what’s actually there. So if “everyone” believes there’s a resistance level at $153 then the stock will behave be like there is even if there’s absolutely nothing about the business to actually justify that.
So it’s real-ish, in the sense that astrology isn’t real but people who believe it will act as if it’s real, which can become a self-fulfilling prophecy.
Absofukinglutely not reliable.
Long story short, the support level and resistance level are based on past prices and the “observed” level of value. Its not guaranteed by anything BUT by what “used to happen”
If something happens that is unprecedented (i.e musk repeatedly shoots himself in the foot), then everything goes out the window.
Remember, support/resistance are not based on actual fact, event, or company value, but literally “the previous price”
Thanks all for the replies. Who is down voting this, stock traders?
Latest Answers