Human emotions, such as fear and greed, and herding mentality, play pivotal roles in the psychology of financial markets. Human emotions can influence the price actions of the financial markets. The price chart and the price actions depict the optimism and pessimism of market participants and how market participants react to future expectations.
Support and resistance levels help identify price points on a chart with a high probability of a pause in the trend (consolidation) or a trend reversal (breakout/breakdown) of the prevailing trend. Support occurs where an advance can pause, and depending on the extent of the demand, lead to a rebound. Resistance occurs where a rally can pause, due to a high level of supply.
Support and resistance zones may appear to be arbitrary, however, it reflects market sentiment and conditioned response or anchoring. Anchoring takes an arbitrary value and assigns a meaning or reference point for a trader or investor. For instance, a previously defined support or resistance level becomes an anchor for future resistance or support. Round or whole numbers also seem arbitrary but can offer symbolic meanings or psychological anchors.
Trading levels, including support and resistance, are driven by human emotions and market psychology. Important price points can act as critical barriers, stopping the advance or the decline from continuing.
Market psychology comes into play because traders and investors tend to remember the past and react to changing market conditions by anticipating future market movements.
In summary, resistance and support levels depict the different levels of sentiment and the changing emotions of market participants influencing prices. The premise of the technical analysis investment discipline is to utilize charting to study past prices to help predict future market moves. The key to successful technical trading and investing depends on correctly identifying the strongest or most relevant support and resistance levels.
Attached below are the key technical support and resistance levels for popular market indexes and financial assets.