We will take an in depth look at how support and resistance parallels with institutional accumulation and distribution and in a more general sense, areas of supply and areas of demand.
In this lesson, we’re going to be talking about one of the most fundamental principles of technical analysis: Support and Resistance. You really cannot start an explanation of Support and Resistance without talking about the skyscraper analogy. Most traders started as market technicians in New York or Chicago in an environment of glistening skyscrapers made out of glass and stone. The skyscraper analogy is as follows: imagine yourself on one of those floors of a skyscraper, you’re standing on the floor, that floor supports you. So you need to always remember that the floor that you’re standing on is your support. If you imagine yourself to have super strength to jump up so high that you could hit the ceiling; the ceiling would resist you. Therefore, the ceiling is your resistance and the floor is your support. Remember these important terms as we continue with this blog.
It’s important for you to understand where the support comes from. This brings us to some institutional terms that we would like to introduce to you: Accumulation and Distribution. An area of support is typically made from institutions as well as some retail traders being interested in accumulating a position at that support level. In other words, it is an area of demand. An area of resistance is made by institutional traders as well as some retail traders looking to distribute the positions at that level, in other words it is an area where others are willing to supply their stock to you, therefore Resistance is an area of Supply.
We want you to understand these parallels:
Support = Demand = Accumulation (Institutional Term)
Resistance = Supply = Distribution (Institutional Term)
Now that we understand these important parallels between areas of support and resistance, let’s go back to the “super strength” jumping from one floor of the skyscraper to the next. The first time you jumped from the floor and hit your head on resistance (the ceiling). You’re not likely to break through the resistance the first time, but you will weaken it. The next time you jump, if you break through resistance (the ceiling) you will land on the next level above or the next floor of the skyscraper; so that resistance (the ceiling) will become support, but one level higher.
Written by Michael DiGioia, Director of Education
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