Why Does Support Turn into Resistance and Vice Versa?

[AgeKay 10]

I see this way too often to deny its significance. Support becomes Resistance and Resistance turns into Support, especially after day's high/low breakouts. It's so accurate (to the tick) that it's scary. I am wondering why that is happening.

 

Two reasons that came to my mind were the following, but both aren't terribly convincing:

 

a) traders that went long at the support try to get out break-even or with a small loss, that's why they keep selling at the previous support, effectively making it resistance.

b) traders know that other traders went long at the support and want to prevent them from profiting so they sell at that price, knowing that long traders have to sell eventually.

 

I hope one of you has a better explanation.

[garak 10]

Both is true in my experience. a) is a common technical explanation that derives from the traders' psychology caught on the wrong foot whereas b) is a self-fulfilling prophecy other traders use to get into the market.

The whole phenomenon is akin to value area trading where you look at historical bid/ask volumes and take em as S/R.

[Kiwi 16]

The reason it can be accurate to the tick is that people know its likely to be accurate to the tick in that market. I trade in markets like that but also in markets that never reach it in a strong move and markets that usually break it by 5-10.

 

So, the basics are:

- people who wanted to get short wait as long as possible and the big guys scale in as price is retracing back to the break point

- people who are long and big scale out as price pulls back to the break point

- if the market is very strong or has typical behaviour then the observant money knows its not likely to get further than xxxx so thats as far as they wait

- when it starts to move away from that point and down again, even a few ticks perhaps, those who, hopefully, waited to see if it might break through this time give up and jump on it.

 

Crowd behaviour in a repeating scenario.

[wjrusnak 10]

Take away the indicators, the moving averages, and the colored bars. In fact, take away the bars and the entire idea of a graphical representation and what are you left with? A price. A value placed upon some underlying object (or paper, or contract), determined by who will or will not pay a particular amount for it. That is it. Nothing more or less. Adding to that, sometimes humans like to keep things simple, especially with numbers (i.e. rounding to the nearest whatever, treasury notes-- $1, $5, $10, $20, $100, etc.). With that in mind, would it not be understandable that if a price provided resistance, that it would also provide support?

 

Let me provide just one example (certainly not applicable to every situation by any means). One man eyes up stock XYZ for months and notes each day what happened with its value. He notices over a number of weeks that the price of the object ranged from 11.50 to 13.50. It never seemed to get lower than 11.50 or higher than 13.50. Out of no where, he wakes up to find that the price had broken above 13.50 to 13.72. Obviously from what he's witnessed over the past few weeks, he knows that this price is "expensive" for the stock, so he waits. Eventually price gets back to 13.51 and he decides its the right time to purchase some shares. Why? Well, the stock is obviously worth more now, otherwise it would not have broken above 13.50. Why 13.50? It was so important for weeks to the sellers, so why wouldn't it have significance now for someone buying? In addition to that, most of us here know that what I just described was a perfect breakout and retracement trade. Many people don't like taking breakouts because of the numerous amounts of fake-outs, so they wait for price to get back to the area in which is broke. If enough people do this, it will be obvious on the chart, hence your R becoming S.

 

But, keep in mind, there are millions of people with more than one reason to buy or sell at a certain price. My only true explanation of why S becomes R is because S/R end up being "markers" for people who are buying and selling. "I'll sell everything if we get to 20 and buy more if it comes back to 10"

 

Below is a chart of GLD with a few levels, in which almost every one acts as both S and R. Price moves in waves that are part of bigger waves. Overall the trend is up, but the waves keep flowing from range to range (keeping to numbers that make sense... numbers that are familiar from hours ago or days ago). Then the quicker buyers (and sellers) decide to exit the range (that GLD is worth more), the stronger (steeper) the trend line gets, flowing from S to R and back again. Maybe what we'll see is that price will find R really soon and retrace back to just above 112. At that point, buyers may "remember" the level and start loading up on shares from the satisfied sellers (or excited short-sellers) that have been dumping their shares on people since the high.

 

 

I hope this helps to paint the picture of what is happening and how interesting it is. We're graphing human emotion playing out in a series of buy and sell orders at specific price markers that seem to repeat themselves for psychological reasons.

 

EDIT: Also, I highly recommend reading DbPhoenix's write-up on this topic.

Edited November 27, 2009 by wjrusnak

[deanz 10]

Why Does Support Turn into Resistance and Vice Versa ?

 

 

That's a good question... here are some more ideas:

 

One reason why price may break support and not come back to it..... If you had enough money to move the market, where is a good place to go short in a big way...... well one place is at support, where Joe Public is exiting his short (with a long) and Joe Smarty is entering a new long because.... it's support you know, so there are plenty of people to take the other side of your large short.

 

One reason why price breaks support, travels a ways down, returns back up to old support before going down again is ..... Joe Public sees the tide has turned and an obvious short, and someone wanted to take the other side of all those shorts ..... either to exit a previous short, or to enter a new long.

 

.

[AgeKay 10]

Thanks for all the responses so far, I really like some of the explanations. Just so you know, I trade very short-term, I don't even look at yesterday's chart, so if you talk about days and weeks, I can't really relate to that. The "markers" explanation by wjrusnak is one of the best explanations though, in my opinion.

[BlowFish 10]

An interesting question. Another way of viewing things is from a more market microstructure type view. Markets exist to facilitate trade. They are systems to match sellers with buyers. The behaviour of markets in general and price in particular can be viewed as a search for liquidity. The reason that these areas are visited and re visited is that they are areas where liquidity (orders) might be found.

[ZOSO 10]

In my opinion, which is not going to be very popular here, support and resistance are convenient ways to describe price movements by traders who need the comfort of an explanation for the logic behind their decisions to buy or sell.

 

Not much different than stereotyping the behavior of certain classes or races of people when they engage in certain behaviors.

[Kiwi 16]

In my opinion, which is not going to be very popular here, support and resistance are convenient ways to describe price movements by traders who need the comfort of an explanation for the logic behind their decisions to buy or sell.

 

Not much different than stereotyping the behavior of certain classes or races of people when they engage in certain behaviors.

 

 

LOL. Why should you be popular. And why shouldn't I annoy you a little:

 

Stereotyping gets a bad rap. Its actually the application of applied statistics and probability. So when we see an overly aggressive fast driver we say "probably a young male" and that is applied statistics ... and "probably" right.

 

The error in stereotyping is when its used lazily or ignorantly with the assumption that "young male = fast aggressive driver."

 

The same applies to S&R. Probabilities based on observed statistics are key - but errors in pattern matching and the stereotyping error above can create problems.

[wjrusnak 10]

In my opinion, which is not going to be very popular here, support and resistance are convenient ways to describe price movements by traders who need the comfort of an explanation for the logic behind their decisions to buy or sell.

 

Not much different than stereotyping the behavior of certain classes or races of people when they engage in certain behaviors.

 

I didn't realize that the OP asked for a definition and whether you believed in support and resistance. I thought he asked why support became resistance and vice versa.

[Kiwi 16]

Yes, but Zoso's point "do you believe in the thing at all" is an interesting one.

 

One of my favourite Wizard's Eckhardt, suggested that many traders made a mistake in paying too much attention to S&R (correct me if I'm wrong please).

[wjrusnak 10]

Yes, but Zoso's point "do you believe in the thing at all" is an interesting one.

 

One of my favourite Wizard's Eckhardt, suggested that many traders made a mistake in paying too much attention to S&R (correct me if I'm wrong please).

 

Ironically, if too many traders pay attention to S/R, you'll see it on a chart.

[ZOSO 10]

I didn't realize that the OP asked for a definition and whether you believed in support and resistance. I thought he asked why support became resistance and vice versa.

It happens because he and others believe it to be so. I know it sounds circular, and it is.

 

Like faith based religions, that belief is the basis for many to explain why they trade at those alleged levels. The theory (faith) justifies the action.

[Tams 20]

It happens because he and others believe it to be so. I know it sounds circular, and it is.

 

Like faith based religions, that belief is the basis for many to explain why they trade at those alleged levels. The theory (faith) justifies the action.

 

 

you sound like you believed what you said...

[wjrusnak 10]

Like faith based religions, that belief is the basis for many to explain why they trade at those alleged levels. The theory (faith) justifies the action.

 

Really? You're going to compare the observation of support and resistance to religion? You can take someone who never traded, tell them to draw a line across a chart, and even they could come up with "hey... it seems like the zig zags occur frequently at that line." In the early days, traders knew nothing but price. You could hear guys phoning into the floor, "give me another 1000 if it hits 82." Eventually it could hit 82, he'll buy up 1000 shares, other guys will notice it in the tick and follow suit. Then you'll get your 82 support. My point is that this all occurred before a graphical representation, thus for you to say that it is some sort of mystical belief is just ridiculous.

 

Oh... and I don't have issues with indicators... I just don't use them. (Referring to your PA Cult remark)

[ZOSO 10]

Really? You're going to compare the observation of support and resistance to religion? You can take someone who never traded, tell them to draw a line across a chart, and even they could come up with "hey... it seems like the zig zags occur frequently at that line." In the early days, traders knew nothing but price. You could hear guys phoning into the floor, "give me another 1000 if it hits 82." Eventually it could hit 82, he'll buy up 1000 shares, other guys will notice it in the tick and follow suit. Then you'll get your 82 support. My point is that this all occurred before a graphical representation, thus for you to say that it is some sort of mystical belief is just ridiculous.

 

Oh... and I don't have issues with indicators... I just don't use them. (Referring to your PA Cult remark)

Now, now, I never said it was a mystical belief. Perhaps I should qualify and say ORGANIZED religion.

 

But we are not talking about the good ole days of guys hollering on the phone here. We are talking about electronic trading where the chart is KING OF THE ROAD and the vehicle for the decisions traders make.

 

Both the indicator and PA guys both suffer from the same groupthink.

[wjrusnak 10]

Now, now, I never said it was a mystical belief. Perhaps I should qualify and say ORGANIZED religion.

 

But we are not talking about the good ole days of guys hollering on the phone here. We are talking about electronic trading where the chart is KING OF THE ROAD and the vehicle for the decisions traders make.

 

Both the indicator and PA guys both suffer from the same groupthink.

 

Alright... now I'm not even sure that you know where you're going with this. S/R exists. I can prove that with a chart. People can trade it (I'm fairly certain some that people who post on P&L and Trading in Real Time prove that). There is no S/R Group (organized) on this thread. If you had found the S/R Trading in foresight thread before, you'd have noticed that some of us even had different levels. Maybe I'll simply ask... what was your point in even posting your "S/R might not be that real..." comment on this thread?

[sevensa 10]

In my opinion, which is not going to be very popular here, support and resistance are convenient ways to describe price movements by traders who need the comfort of an explanation for the logic behind their decisions to buy or sell.

 

Not much different than stereotyping the behavior of certain classes or races of people when they engage in certain behaviors.

 

Can't you say that for any methodology you use, that it is just to give you the comfort to provide a reason about why you take a trade? Whatever methodology you use and think to be correct, I am sure that someone will be able to provide different reasons than you did to take any of your trades.

[AgeKay 10]

Alright girls, can you please stop arguing about stupid shit and focus on the topic of the thread. It started out so well, but the signal-to-noise ratio went down significantly with the past posts.

[ZOSO 10]

Alright girls, can you please stop arguing about stupid shit and focus on the topic of the thread. It started out so well, but the signal-to-noise ratio went down significantly with the past posts.

Are you a misogynist?

[wjrusnak 10]

Below is a chart of GLD with a few levels, in which almost every one acts as both S and R. Price moves in waves that are part of bigger waves. Overall the trend is up, but the waves keep flowing from range to range (keeping to numbers that make sense... numbers that are familiar from hours ago or days ago). Then the quicker buyers (and sellers) decide to exit the range (that GLD is worth more), the stronger (steeper) the trend line gets, flowing from S to R and back again. Maybe what we'll see is that price will find R really soon and retrace back to just above 112. At that point, buyers may "remember" the level and start loading up on shares from the satisfied sellers (or excited short-sellers) that have been dumping their shares on people since the high.

 

 

Not to blow my own horn or anything.... but:

 

 

GLD found support and the previous resistance spot (which I marked on a chart last week). Why did it happen? Read what I had to say in post #4.

 

S/R is real... trade-able... and somewhat predictable. Hope that helps.

 

PS. Don't mind the RSI... I forgot to remove it on stockcharts.com

[RichardTodd 10]

PS. Don't mind the RSI... I forgot to remove it on stockcharts.com

 

Looks like the RSI finally broke through resistance at 70. Maybe it will become support soon.

 

FWIW the mindset I keep is the "search for liquidity" one that Blowfish mentioned. I tend to see price as drifting in the direction of least resistance. This means it bounces off areas where lots of orders are. If someone happens to push it to the other side of a highly liquid zone, then it will start bouncing off if it from the other side if people continue placing orders there. Support becomes resistance.

 

As with all theories like this, I have no way to verify it one way or the other... I just go with what makes the most sense to me with the information I have. In my view, the most important thing is to have a theory in mind that allows you to make confident (and statistically profitable) moves in the market. No time for second-guessing when a trade needs to be put on!

Edited December 1, 2009 by RichardTodd
spelling error

[SunTrader 10]

 

 

PS. Don't mind the RSI... I forgot to remove it on stockcharts.com

Some like to plot S/R on indicators like RSI but I believe like yourself price rules all others.

[patrader 10]

when the market breaks out above resistance price will either continue up without testing the breakout area or price will pullback and test the breakout(previous resistance level).if the market pulls back to the previous resistance level it will then test to see what the strength of the buyers are at this level.if it holds and bounces and continues up then you can assume that institutions were defending their positions.if it doesn't hold but instead continues down then the breakout failed because of lack of institutional support.S/R is just one part of reading the market with price action.context is very important.is the market in a trading range or trend? if in a trend, is it a trading range trend or a strong trend with little overlap? how many times has the market tested this resistance level? hth

[DugDug 10]

Q: Why Does Support Turn into Resistance and Vice Versa?

A: Because its a market