Reversal of Roles

Now for reasons I’ll go on to explain, often support and resistance reverse their roles, once they are penetrated or ‘broken’. If the price goes up through resistance by a good way, then that resistance level becomes a support level when the price comes back down. Here’s an illustration of that.

And in the same way, when you have a downtrend, often the support which gets penetrated becomes a resistance next time the price rises, as you can see here.

OK, well these are just drawings, so here is an actual share chart which shows the real thing. The resistance level of 26.6 in July becomes a support in September and again in November and December.

On this graph you can also see how the support and resistance are constantly touched and bounced off when the stock is trading sideways from September through December

One of the motives for looking at different time periods of charts is to see if there are any historic levels that could become support or resistance in the current timeframe, as they do tend to show up again.

For support and resistance to change their roles, the price has to go well past the level, called the amount of penetration. Some people use 3% penetration as a guideline. The price might just penetrate but come back into the pattern, as trading isn’t that precise. For a reversal of roles, the market participants have to change their minds, and think that they had it wrong, and this requires a definite penetration. The further away it goes, the more likely they are to think this.

This entry is filed under course. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.