Why Does Support Turn into Resistance and Vice Versa?

[nooby 10]

I think it started sometime back in history with some valid basis - like value of stock based on company performance where once the price crossed the 'resistance' no one was willing to consider a price lower to sell.

 

Ever since tech analysis has become mainstream i think it is the stops that more or less drive it.

[SunTrader 10]

The basis is supply and demand. When price returns to a prior resistance pivot more supply comes into the market. If the market pushes it higher through the resistance then once it returns to this prior reistance point there "should" be less supply therefore it turns now to support. Note these support/resistance areas are zones and not exact levels.

 

See following IBM chart as an example of resistance turning to support which now on Friday returned to resistance. Also the close on Thursday had already showed react to this zone. This area was also S/R back in May/July/Aug '08.

Edited January 23, 2010 by SunTrader

[AgeKay 10]

  SunTrader said:

Note these support/resistance areas are zones and not exact levels.

 

It depends on the market. In the bund, S/R is accurate to the tick.

[Marko23 10]

  AgeKay said:

It depends on the market. In the bund, S/R is accurate to the tick.

 

Hmmm ... most times yes. But it remains a market with many traders and big volume.

 

Sometimes it proceeds like a communcation protocol, price moves to S as a message, climbs a little distance as an ACK,

comes back as a message asking for confirmation, climbs agains as ACK or falls thru as NAK.

 

So traders may be communicating to each other using price as a channel and R/S as a protocol.

Edited January 24, 2010 by Marko23
Added some thoughts.

[SangreDeToro 10]

  Marko23 said:

Hmmm ... most times yes. But it remains a market with many traders and big volume.

 

Sometimes it proceeds like a communcation protocol, price moves to S as a message, climbs a little distance as an ACK,

comes back as a message asking for confirmation, climbs agains as ACK or falls thru as NAK.

 

So traders may be communicating to each other using price as a channel and R/S as a protocol.

 

hahaha - think the algos are feeling each other up :0

[Grey1 10]

The main reason for supports/ resistance not holding is the pattern recognition algo's used by block traders... These algo's once confirm a trending down / up in a major index then no longer use their oscillator based module to trade and hence support or resistance becomes far far less effective in their exit strategy . ( hence going through support )

There was a very strong support on GS @ 160 but there was over 12 block trades ranging from 1.2mil to 5 mil last past two trading days to cut through the 160 level like hot knife through the butter,,,

 

hope this makes sense

 

Grey1

[uexkuell 10]

Some people will not like this way to think about “S/R” but perhaps it may be helpful to others:

 

Assume that S/R is a valid concept.

(Perhaps even “to the tick” as was posted here)

 

Then it would be trivial to design a highly profitable strategy from it:

- When price is going down and approaching support: Position a buy order with size X (less than 50% of the buying power of the account) at support.

- If price goes up after touching support stay in the position until your profit target is reached (or exit at break-even if price is moving back down)

- If price breaks support (going further down) reverse position to short with size 2*X. Then stay (at your discretion) in the position until the loss vanishes (break-even) or ride the downtrend to the next lower support.

 

If it would be safely possible to spot S/R the outlined strategy would be fail-safe and it would at worst break even, never loose.

Therefore it would be easy to make nearly unlimited amounts of profit using this strategy.

 

 

Since we know that this does not work so simply some other idea might be considered:

 

“Support” and “Resistance” are concepts that work sometimes but only on a rather statistical basis and they are in many cases just expressions of random processes.

(Please do not think that I am adherer to the random walk hypothesis of the markets – I am certainly not. Just quite skeptical about the validity of S/R).

 

So trying to answer the question “why does S turn into R?”

S and R are not really well-defined.

At least much worse defined than people think.

And mathematical logic says that it is impossible to answer a question in which the words of which it is constituted are not clearly defined.

[AgeKay 10]

  uexkuell said:

If it would be safely possible to spot S/R the outlined strategy would be fail-safe and it would at worst break even, never loose.

 

You're always risking at least 1 tick (2 ticks if you use stop orders) whenever you enter a position. Just because S/R breaks, does not mean that it will move far enough to make it worthwhile. And I don't know what market your trading but the bund does not always move in discrete steps. If you check today's chart, you can see that it literally jumped from 123.41 to 50 at 11:17am CET.

 

  uexkuell said:

“Support” and “Resistance” are concepts that work sometimes but only on a rather statistical basis and they are in many cases just expressions of random processes.

 

I agree. I my opinion, S/R is less about how often it works (accuracy) but more about finding good entries. If you're S/R is broken, you know you're wrong.

 

  uexkuell said:

S and R are not really well-defined.

At least much worse defined than people think.

 

I agree that many people use it very broadly. For me, S/R are prices where a price move has reversed repeatedly.

 

For example, if you look at today's chart of bund, between 9:07 and 9:45 CET, the bund bounced off of 123.26/27 exactly 29 times and then another 3 times off of 123.25. If this wasn't Support that I don't know what is. During the same time, it bounced off of 123.29/30 also 19 times. So that was the corresponding Resistance which later on (13:40 CET) turned into support and then after climbing 14 ticks bounced off of 123.44, of which it bounced off of earlier twice (12:12 and 12:32 CET).

[Nemesis 10]

It's the ultimate slap in the face, the price action definition of a breakout.

 

Imagine Resistance being the Bear and the Bull approaches him says right to his face you are now one of us, and the Bear joins the Bull to become one.

 

Nemesis

[Logic 10]

I got an email this morning asking me why I had not not been back in a while to the forums. Then I stopped back to see if any interesting discussions were happening and spotted this thread. I read the entire thread and then realized why I hadn't been back for a while.

 

There were a few traders stating that "Support becomes Resistance and vice versa . . . to the tick" but no one posted a chart to show this interesting phenomenon. Seeing that it NEVER happens consistently, how could anyone use this as a trading tool?

 

Support and Resistance are the fundamental building blocks to every chart. It is not only critical that your charts create readable Support & Resistance but you understand how to recognize those points on your chart. What is consistent is that the creation of Support will ALWAYS be followed by the creation of Resistance which will ALWAYS be followed by the creation of Support which will ALWAYS be followed by the creation of Resistance which will ALWAYS be followed by the . . . . forever and ever and ever.

 

Support and Resistance points are proof that price action is cyclic but what is important is the cycle itself not that the cycle has a specific duration (which they do not) nor that specific cycle tops become specific cycle bottoms which does not happen with any useful consistency.

 

Once you understand that Support & Resistance are constants (if your charts are built without the variable aspects of time) then trading becomes as simple as trading from established and confirmed Support toward established and confirmed Resistance and trading from established and confirmed Resistance toward established and confirmed Support. You can take it a step farther if you understand there are 2 distinct levels of Support and Resistance, Prime & Minor.

[maxima 10]

  wjrusnak said:

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. ...

 

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

hey hey lookie who is here arent you dbphoenix himself? disguised as a common man!

 

p.s. i always knew phenix is russian

[maxima 10]

  BlowFish said:

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.

yeah, cant agree more

[ChampM 10]

Very interesting discussion -- the real question, it seems to me is how to find support and resistance. A quantifiable solution exists and is more reliable than just eyeballing a chart.

 

If you've ever looked back in time on any chart it seems that price reacts to the same levels over and over -- what was support/resistance 2 years ago is likely to hold in the present.

 

My two pennies. . .

Champ

[AgeKay 10]

I have come to the realization that it might actually be my explanation b) after looking at the DOM for some time. There are certain prices that everyone is watching, e.g. high and low of day. And since S/R are good entries, you usually see a lot of volume transact at these prices. The winner of those battles then immediately post huge bid/offers to prevent the losers from getting out break-even of their positions. Everyone who is on the losing side wishes they were on the other and since breaks of important S/R signify trend changes, no one wants to be on the losing side any more and the previous S/R looks like a good price to go with the new trend.

[Nemesis 10]

  Logic said:

There were a few traders stating that "Support becomes Resistance and vice versa . . . to the tick" but no one posted a chart to show this interesting phenomenon. Seeing that it NEVER happens consistently, how could anyone use this as a trading tool?

 

The gold is not found in the consistency, such consistency will only be found in strong trends, the gold in this lies in that they do act as mini pivots, allowing you to enter with minimal risk and landing a winner should you be right on direction; which is for the most part, the key to trading.

[Nemesis 10]

Here's a live example not in hindsight.

 

Expect the first tests to hold, whatever happens next, it's anyone's guess, but the fact that we approached precisely this level just before new earning seasons is far from a coincidence. If you were long, as you should had been, this level was a magnet.

[AgeKay 10]

  Logic said:

There were a few traders stating that "Support becomes Resistance and vice versa . . . to the tick" but no one posted a chart to show this interesting phenomenon. Seeing that it NEVER happens consistently, how could anyone use this as a trading tool?

 

You won't see it on bar charts or candle stick charts. I developed my own time chart where it does show up consistently, but I am not going to post it.

[maxima 10]

  AgeKay said:

I developed my own time chart where it does show up consistently, but I am not going to post it.

thats my boy! :rofl:

[SunTrader 10]

  AgeKay said:

.............. but I am not going to post it.

Shucks, I'm so disappointed.

[SunTrader 10]

  Nemesis said:

Here's a live example not in hindsight.

 

Expect the first tests to hold, whatever happens next, it's anyone's guess, .......

I'm sure you are not meaning the posted chart's exact point but I look for a "zone" of support or resistance, especially when it involves a bar with a spike bottom or vice versa top. A daily chart for that zone shows weekly high/low and how price and volume reacted just prior to and into big selloff in Sept/Oct '08.

[Nemesis 10]

  SunTrader said:

I'm sure you are not meaning the posted chart's exact point but I look for a "zone" of support or resistance, especially when it involves a bar with a spike bottom or vice versa top. A daily chart for that zone shows weekly high/low and how price and volume reacted just prior to and into big selloff in Sept/Oct '08.

 

Yes, it's an area not an exact number, particularly in a chart as big as this (weekly).

[martinguitar 10]

  AgeKay said:

You won't see it on bar charts or candle stick charts. I developed my own time chart where it does show up consistently, but I am not going to post it.

 

Keep that grail secret.

 

The whole idea is that once the level that the longs entered positions at is broken, they are still in losing trades or had their stops taken out. Now, some of these longs will want to get out at break even, so they exit once price returns to the broken support, creating resistance. Also, the shorts who missed the first wave enter on a retest and some prior shorts add. Either way, the only thing that causes support to become resistance (and vice versa) is traders. They can act as buyers or sellers.

Edited April 11, 2010 by martinguitar

[AgeKay 10]

  martinguitar said:

The whole idea is that once the level that the longs entered positions at is broken, they are still in losing trades or had their stops taken out. Now, some of these longs will want to get out at break even, so they exit once price returns to the broken support, creating resistance. Also, the shorts who missed the first wave enter on a retest and some prior shorts add. Either way, the only thing that causes support to become resistance (and vice versa) is traders. They can act as buyers or sellers.

 

Exactly. That's what I was trying to say with my post although your post describes it much better than mine and yours is easier to understand.