The "supply" line shows the quantity (i.e., the number of shares) that sellers are willing to supply at a given price. When prices increase, the quantity of sellers also increases as more investors are willing to sell at these higher prices.
The "demand" line shows the number of shares that buyers are willing to buy at a given price. When prices increase, the quantity of buyers decreases as fewer investors are willing to buy at higher prices.
At any given price, a supply/demand chart (see Figure 12) shows how many buyers and sellers there are. For example, the following chart shows that, at the price of 42-1/2, there will be 10 buyers and 25 sellers.
Support occurs at the price where the supply line touches the left side of the chart (e.g., 27-1/2 on the above chart). Prices can't fall below this amount, because no sellers are willing to sell at these prices. Resistance occurs at the price where the demand line touches the left side of the chart (e.g., 47-1/2). Prices can't rise above this amount, because there are no buyers willing to buy at these prices.
In a free market these lines are continually changing. As investor expectations change, so do the prices buyers and sellers feel are acceptable. A breakout above a resistance level is evidence of an upward shift in the demand line as more buyers become willing to buy at higher prices. Similarly, the failure of a support level shows that the supply line has shifted downward./p>
The foundation of most technical analysis tools is rooted in the concept of supply and demand. Charts of security prices give us a superb view of these forces in action.
