Support and Resistance: Good sell signals from stocks that are far below resistance and lack support

Published 26 September 2019

Stocks that are far below resistance and lack support have done very poorly in the following period. Despite these being considered theoretically neutral situations, our research results show that statistically they are very good sell signals.

According to technical analysis theory, support and resistance are among the most central concepts in technical analysis and can in theory be used to find good buy and sell levels.

Figure 1: The price is below a resistance level, where the stock has previously turned downwards. Many investors may consider it expensive if it rises up to resistance, and may then wish to sell.
Resistance is a level where many sellers are thought to become active. It is normally assumed that the stock will not rise above the resistance level. Resistance is thus often used to calculate the upside potential of a stock, especially for short term investors. A stock with a long way up to resistance has a bigger upside potential than a stock near resistance.
Especially in falling and horizontal trends, resistance expresses the upside potential in the stock. If, at the same time, there is little to no support below the current price, the downside potential tends to be big.

Research results

We have studied return from Norwegian, Swedish, Danish and Finnish stocks following signals triggered by stocks' movements in relation to support and resistance levels in technical price charts. We used support and resistance levels automatically identified in Investtech’s medium term price charts. We had 23 years of data, from 1996 to 2018.

The chart below shows average price development following sell signals from stocks far below resistance and lacking support in Investtech’s medium term price charts. The signals are triggered on day 0. Only days when the exchange is open are included, so 66 days equal approximately three months. The thick red line shows the development of sell signal stocks. The shaded areas are the standard deviation of the calculations. The thin red line shows benchmark development in the same period as the sell signal stocks.

Figure 2: Return following sell signals from stocks far below resistance and lacking support identified in Investtehc’s medium term price charts. The thick red line is signal stocks, thin red line is benchmark, the Nordic markets, 1996-2018.

The chart and table show that stocks with sell signal because they are below resistance and lack support on average have fallen in the following period. Three months after the sell signal was triggered, the sell signal stocks had on average fallen 1.2 per cent, equal to 2.0 percentage points weaker than benchmark.

The data set is large with 19,586 signals over a period of up to 23 years. Statistical t-value is 8.7, suggesting high statistical significance.

Article on buy signals:
Buy signal when stock is above support and lacks resistance

Read more in the research report here.