Price Patterns - Resistance Levels Are Barriers to Price Upsides

Prices do not go up in a straight line. After prices rise for a few days, some traders decide to sell and prices temporarily decline. Then traders step in and start buying again. As prices continue to rise, they may attain a level previously reached that forms a barrier called a resistance level. A previous double, triple or sharp top often indicates a resistance level of a current upside. For prices to continue their upside, prices must "break through" the resistance level.

If prices fail to break through the resistance level, the upside is stalled or ends. But if prices break through a resistance level, they usually continue to rise and may test the next resistance level. However, in real time you never actually know the future price pattern so you should use resistance levels only as a guide to what could happen to prices.

The daily price chart for Credence Systems (CMOS) shows the current upside and a possible upside in dashed green and five resistance levels that are based on previous prices. CMOS closed at $10.64 on July 22, 2005 having broken through the first resistance level (labeled 1) of $9.65. The next resistance level (labeled 2) is at $14.20. If the upside were then to continue, CMOS prices would have resistance at $16 (labeled 3), $17 (labeled 4) and $25 (labeled 5).

The close-up chart of CMOS daily closes shows the first two resistance levels.