In technical analysis, we often talk about invisible floors and ceilings in the stock price. These are price levels where the market seems to turn every single time. We call the floor support, and the ceiling resistance.
"When one door closes, another opens."
— Florence Scovel Shinn
This quote illustrates exactly what happens when a ceiling is shattered in the stock market. If a stock price finally manages to break through a strong resistance level (the ceiling), the psychology changes. The old ceiling often becomes the new floor (support) for the stock going forward!
Why do these levels occur?
Human psychology: Support and resistance are created by memory. If a stock fell from 100 kroner down to 50 kroner last year, many investors will remember 100 kroner as too expensive. The next time the stock approaches 100, everyone starts selling at the same time, creating an invisible ceiling (resistance).
How to trade on the levels
- Buy when the stock falls towards a known support level (floor), as the risk of further decline is often lower.
- Sell, or take some profit, when the stock approaches a strong resistance level (ceiling).
- If the ceiling is broken on high volume, it can be a powerful buy signal.