Definition
A support level is a price level on a chart where a downtrend tends to pause or reverse due to a concentration of buying interest. It represents a psychological or historical floor, where demand is strong enough to prevent the price from falling further.
Support can be:
- Static (a fixed price level or zone).
- Dynamic (moving averages or trend lines acting as evolving support).
When price tests the support level and doesn’t break below it, it often signals a buying opportunity. If broken decisively, the support can turn into a resistance level.
Case Study
An example can be seen in the trading pattern of Reliance Industries’ stock on the National Stock Exchange (NSE). Suppose the stock has repeatedly bounced back after touching around ₹2,200 over several months. Each time it approaches this level, buyers step in and push the price higher, showing that there is strong demand at ₹2,200. This price zone thus becomes a key support level. If Reliance falls close to ₹2,200 again, traders watch closely for reversal signals to enter long positions, expecting the price to rise from there. However, if the stock breaks below ₹2,200 with heavy volume, it may indicate weakening support and the start of a downward trend.
Historical Reference
The concept of support and resistance was formalized through Dow Theory in the early 20th century by Charles Dow. Over time, support levels became a core concept in technical analysis, especially after the works of Edwards & Magee in Technical Analysis of Stock Trends (1948), who defined support as zones where buyer demand historically exceeds selling pressure.