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CandleStick
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Support and Resistance form the foundation of most chart patterns. The key to support and resistance is to understand that the market
has a memory. A support level is the price at which buyers are expected to enter the market in sufficient numbers to take control from sellers. When price falls to a new low and then rallies, buyers who missed out on the first trough will be inclined to buy if price returns to that level. Afraid of missing out for a second time, they may enter the market in sufficient numbers to take control from sellers. The result is a rally, reinforcing perceptions that price is unlikely to fall further and creating a support level.
Resistance When price makes a new High and then retreats, sellers who missed the previous peak will be inclined to sell when price returns to that level. Afraid of missing out a second time, they may enter the market in numbers sufficient to overwhelm buyers. The resulting correction will reinforce market perceptions that price is unlikely to move higher and establish a resistance level.
But wait... because if support levels are breached, once they are penetrated they frequently become resistance levels, and likewise resistance levels may become support levels! The logic is rather simple: buyers who purchase near a support level, only to see the price fall, are likely to sell in order to recover their losses when the price rallies to near their break-even point. The support level then becomes a resistance level.
Likewise, stockholders who sell when price approaches a resistance level will be quite disappointed if the price penetrates the level and continues to rise. They will be inclined to buy if price returns to near the support level, fearing that they may miss out a second time. The resistance level thus becomes entrenched as a support level. Some support and resistance levels are more
important than others. |
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