A support level is a price point on a chart where a financial asset tends to find buying interest, preventing the price from falling further.
Understanding support levels
A support level occurs because market participants perceive the asset to be underpriced at that specific level. As the price drops toward this point, demand increases and supply decreases. Buyers initiate long positions while short sellers close out their trades. This combined buying pressure absorbs the selling pressure and halts the downward price movement. For Elephants trading global markets, identifying these zones is a standard method for determining entry points.
Traders use historical price data to locate these areas. If a stock or currency pair repeatedly bounces off a specific price over weeks or months, that price becomes an established support level. Technical indicators like moving averages and Fibonacci retracements also generate potential support zones. The concept applies across all international financial markets, including equities in London or global foreign exchange pairs.
Support levels are not permanent. If selling pressure outweighs buying demand, the price drops below the established support level. This event is known as a breakdown. When a breakdown occurs, the old support level often becomes a new resistance level. Traders watch trading volume during a breakdown to confirm the validity of the price movement.
Example
Suppose you, as an Elephant, are monitoring the stock of Trunk & Tusk Cargo, a regional transport company listed on the Johannesburg Stock Exchange. Over the past year, the stock price declines to 150 ZAR on four separate occasions. Each time the price reaches 150 ZAR, buyers enter the market and push the price back up to 180 ZAR. The 150 ZAR mark is the support level. If an Elephant wants to buy shares, they place a limit order near 150 ZAR, anticipating the price will bounce off this line again. If poor financial results cause the price to drop to 130 ZAR, the support level is broken.