I explained the definition of “Support & Resistance” earlier, so I assume you understand what I mean. It is astounding how previous levels of support and resistance can provide continued support & resistance in the future, or conversely, how previous support may later act as resistance & vice versa. Being aware of these tendencies can give you “reasons” to be aware of potential reversal points, with obvious application to your trading.
I’ve selected this chart shot even though it doesn’t show the nicest examples
of support turning into resistance (& vice versa) because it shows a couple of
these examples on one chart and a convergence. Notice that the green line
very nicely supports 5 times before that trend was broke and a new down
trend go established. Notice that the market hesitated right where it broke out
(brief consolidated stagnation) as it wondered whether to bounce or to
breakout. That showed that the trend tried to hold the support, but the market
broke through that support. Then that support line acted as resistance twice;
an example of how a previous support line often acts as a swing resistance in a
trend reversal. Notice also that the second time it bounced that original green
line that it ALSO bounced the new downwards resisting trendline (blue
line). This is an example of convergence of multiple technical analysis
“reasons”. Later after the market broke out of that second trend (notice the
“diamond reversal” at the bottom – explained later in this eBook) the blue
resistance line offered some support.
Here you see a trending channel where the market sneaks over to the other
side of the resisting trendline where it then treats it as support. You’ll
frequently see something like this where the market actually continues the
trend direction for a while, only hugging the trendline from the other side
This chart shows numerous examples of horizontal support & resistance from
previous significant highs & lows. Notice that the green horizontal line was
an area of resistance for a number of those tops, which later became the
resistance after the shooting price reached it and formed a consolidation. The
blue horizontal line started as resistance from that first high touching it, then
became support for a while near the top of the chart, and later became
resistance again as that rogue spike hit it. The red horizontal line acted as
resistance to the Double Top formation (reversal pattern). Also note that on
larger scale charts that Double Top would look like a Tweezer Top (which is
ultimately the same thing). Notice I also drew the Fibonacci lines (black solid
& dotted lines). Notice that the 62% is approximately at the green horizontal
line. This would lead me to speculate that the market will continue down to
about that level where it will likely reverse (there are even more “reasons”,
but I won’t cover them all here). Notice also where the market is – I’ve just
made a prediction that hasn’t yet been fulfilled (so you don’t think that I only
see these things after they happen).
Ok, so now you know how to find levels of potential support and
resistance. So what? Well the reason you look for them is so that you can
find potential “reasons” for the market to reverse around certain key
areas. Armed with this foresight you can anticipate where trends are likely to
end and new trends are likely to begin.
FYI – Some people call these things “pullbacks” or “throwbacks”
when the market meets the previous resistance/support line from the
other side of the line. More specifically a “pullback” is when it comes
close to or just meets the line, and a “throwback” is when it minorly
penetrated the line. The above examples showed both kinds of events
but I didn’t label them as such. I’m just telling you this incase you
encounter people who fling around those words just so you understand
what is meant by them.
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