The term resistance refers to a price point above which movement is impeded by the economic law of supply and demand. Resistance to movement above this price point typically occurs over an extended period of time.
The upward price movement of a security or market will normally reach a point at which it demonstrates significant resistance to additional upward movement. As this occurs, the market or security is said to be range bound. A market may test this resistance level and fail to breakthrough it on a number of occasions.
Resistance can be explained in both technical and psychological terms. For example, it may be a function of the economic law of supply and demand. As the price of the security reaches a point beyond what institutional investors believe represents its fair market value, sell orders may flood the market, thereby driving the security’s price down. As individual investors examine the price movement of a security and observe a level of resistance, they may also participate in the sell-off of the security.
Over time, the security may experience a pattern of price increases and subsequent price retreats. Eventually, supply and demand will come back into balance and the price which may have been identified as a resistance point may be deemed a new support price from which additional upward movement is possible.