Support Levels
Support Levels: The Price Floor
A support level is a price point where a stock tends to stop falling and bounce back up. Think of it as a floor beneath the stock's price. When the price drops to this level, buyers step in because they see the stock as good value, creating enough demand to halt the decline.
How to Identify Support
Look at a stock chart and find price levels where the stock has bounced upward multiple times in the past:
- Scan the chart for areas where the price has fallen to a certain level and then reversed upward
- If the price has bounced off the same level two or more times, you have found a support level
- The more times a level has held, the stronger the support
For example, if KCB has repeatedly bounced off KES 35 over the past six months, KES 35 is a strong support level. Each time the price approaches that level, buyers consider it a bargain and step in.
The Psychology Behind Support
Support levels work because of investor psychology:
- Buyers remember — Investors who bought at support before and saw the price rise will buy again at the same level
- Regret — Investors who missed the previous bounce regret not buying and are ready this time
- Value perception — The market collectively agrees that below this price, the stock is undervalued
When Support Breaks
Support does not hold forever. When a stock breaks below a support level — especially on high volume — it is a bearish signal. The old support level often becomes the new resistance level, meaning the price may have trouble rising back above it. This is called a role reversal and is one of the most important concepts in chart reading.
A broken support level is like a broken floor — what used to hold you up now acts as a ceiling keeping you down.