Support and Resistance: Buy signal when stock is above support and lacks resistance

Published 26 September 2019

Stocks that are far above support and lack resistance have risen a great deal in the following period. Despite these being considered theoretically neutral situations, our research results show that statistically they are very good buy 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 prices.

Figure 1: The price is above a support level, where the stock has previously turned upwards. Many investors may consider it cheap if it falls towards support again, and may then wish to buy.
Support is where many buyers are thought to become active. It is normally assumed that the stock will not fall below support. Support is thus often used to calculate the downside potential in the stock, especially for short term investors. A stock with a long way down to support has a bigger downside than a stock near support.
Especially in rising and horizontal trends, support expresses the downside potential in the stock. If, at the same time, there is little to no resistance above the current price, the upside potential tends to be high

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 buy signals from stocks far above support and lacking resistance 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 blue line shows the development of buy signal stocks. The shaded areas are the standard deviation of the calculations. The thin blue line shows benchmark development in the same period as the buy signal stocks.

Stocks with buy signals from being above support and lacking resistance have risen in the following period. The rise in the first three months after signals was on average 5.9 per cent for 44,463 signals from the Nordic markets combined. This equals an excess return of 2.8 percentage points vs benchmark in the same period. Annualised excess return was 12.0 percentage points.

Statistical t-value is a high 24.9 for 66-day figures, suggesting significant positive deviation from benchmark development. Excess return of 2.8 percentage points in three months indicates that these signals can be valuable input into an active trading strategy also taking into account commission and other trading costs.

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

Read more in the research report here.

Keywords: h_Res,h_Sup.