Understanding support and resistance is essential for understanding price trenda and chart
patterns. Rating their strength helps you decided whether the trend is likely to continue or to reverse.
Support is a price level where buying is strong enough to interrupt or reverse a downtrend. When a downtrend hits support,
it bounces. Support represented on a chart by a horizontal or near-horizontal line connecting several bottoms.
Resistance is a price level where selling is strong enough to interrupt or reverse an uptrend. When an uptrend hits
resistance, it stops or tumbles down. Resistance represented on a chart by a horizontal or near-horizontal line connecting several tops.
Minor support or resistance causes trends to pause, while major support or resistance causes them to reverse. Traders buy at support and sell
at resistance.
Support and resistance exist because masses of traders feel pain and regret. Traders who hold losing positions feel intense pain.
Losers are determined to get out as soon as the market gives them another chance.Traders who missed an opportunity feel regret and
also wait for the market to give them a second chance. When the market stays flat for a while, traders get used to buying at the lower
edge of the range and shorting at the upper edge. In uptrends, bears who sold short feel pain and bulls feel regret that did not buy
more. Both feel determined to buy if the market gives them a second chance. The pain of bears and regret of bulls make them ready to
buy, creating support during reactions in an uptrend. Resistance is an area where bulls feel pain, bears feel regret, and both are ready
to sell. The strenght of support and resistance depends on the strength of feeling among masses of traders.
Strength of Support and Resistance.
A congection area that has been hit by several trends is like a cratered battlefield. Its defenders have plenty of cover, and an
attacking force is likely to slow down. The longer price stay in a congestion zone, the stronger the emotional commitment of bulls and
bears to that area. When prices approach that zone from above, it serves as support. When price rally into it from below, it acts as
resistance. A congestion area can reverse its role and serve as either suport or resistance.
The strength of every support and
resistance zone depends on three factors: its length, its height, and the volume of trading that has taken place in it. In short this is
the length, the width, and the depth of a congestion zone. The longer a support or resistance area- its length of time or the number of
hits it took - the stronger it is. The strength of support and resistance increases each time that area is hit. When trades see that
price have reversed at certain levels, they tend to bet on a reversal the next time prices reach that level. The taller the support and
resistance zone, the stronger it is. The grater the volume of trading in a support and resistance zone, the stronger it is. High volume
in congestion area shows active involvement by traders - a sign of strong emotional commitment. Low volume shows that traders have
little interest in transacting at the level - a sign of week support or resistance.
True and False Breakouts.
Market spend more time in trading ranges than they do in trends. Most breakouts from trading ranges are false breakouts. They suck in
trend-fol-lowers just before prices return into the trading range. True breakouts are confirmed by heavy volume, whike false breakouts
tend to have light volume.
True are confirmed when technical indicators reach new extreme hights or lows in the direction of the trend,
while false breakouts are often marked by divergences between prices and indicators.
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