Support and Resistance levels are patterns of classical technical analysis. All trend (channel) lines, reversal and continuation chart patterns are only combinations of support and resistance levels.
A support level is a starting point of an uptrend, and is actually a tangent to the minimum price. It is commonly thought that when the price falls down to the support level, Bulls (buyers) start to resist against further price decreases thus giving it support. This explains why in many cases the price will bounce back and start rising after having reached a support level.
After several attempts the price may break the support level. Once the support level is broken, it becomes the resistance level:
Support level
Here is an example of when a support level became resistance in September 14, 2003:
September 14, 2003 (after the breakout): support level becomes resistance
The Resistance level is a tangent to the highest price:
Resistance level
Generally, once the price reaches this level it will not get any higher. After several attempts the price may break the resistance level. Once the resistance level is broken it becomes the support level.
Support and resistance levels are easy to create and are a highly effective method for forecasting price behaviour. In order to define if the support/resistance level breakout is true, please refer to the criteria outlined for trend lines.
