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What Is a Zone of Support?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 20 November 2016
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    Conjecture Corporation
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A "zone of support" is a term that is used to refer to stock options that begin to earn support from the investment community. As a result of this support, the price of the stock begins to move upward as the trading of the shares begins to increase. The support is not usually tied with a specific price, but rather a price zone or range in which the support appears to be ongoing. The questions of how high the price may rise and how far it can drop while still retaining that support helps to determine the parameters for the zone of support.

Analyzing the zone of support for a given investment is important when it comes to buying or selling different stock offerings. The idea is to accurately determine how the market will react to the stock price at different levels. Assuming that the company issuing the stock in question is stable and the demand for its products is likely to increase, an investor may be able to purchase shares before that price enters the lower area of the zone of support, then hold the shares as the price moves upward within that zone. As the price begins to crest near the upper limits of the price zone, the investor may choose to begin selling shares off before the price begins to fall, making it possible to earn a significant return from the strategy.

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There are a number of factors that can affect a zone of support. The development of new technology that threatens to make the product line of the underlying company obsolete or at least less in demand will in turn impact the status enjoyed by the stock among investors. Concerns about the leadership of the company, such as with the resignation and selection of a new company president or CEO, may also slow the momentum of the stock price, causing it to fall rapidly. Natural disasters, the outcome or political elections, or a significant change in the general economy that affects consumer buying habits could also lead to shifts in the zone of support.

It is important to note that stock prices within a zone of support may move upward and downward from time to time. Typically, investors will watch the movements but not choose to take any action unless those shifts reveal the development of an unfavorable pattern. At that point, there is a good chance that the investor will choose to sell the shares rather than continuing to hold them, making it possible to minimize the chances of losing any returns already generated, or even to avoid the loss of the original investment.

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