Resistance becomes Support (and vice versa)

First a couple of definitions:

• Support is a level at which the price of a financial instrument is more likely to rebound upwards because it finds “support” in the market.
• Resistance is a level at which the price of a financial instrument is more likely to rebound downwards because it meets “resistance” in the market.

In the following chart I have used horizontal lines to show the price support levels for this particular financial instrument. Wait a minute, no! In the following chart I have used horizontal lines to show the price resistance levels for this particular financial instrument. And that’s my point here, as will be explained after you’ve looked at the chart.

My point is that in some cases a previous resistance level (above which the price is unlikely to rise), once broken, becomes a new support level (below which the price is unlikely to fall).

The phenomenon may be useful not only in timing the entry into a new position but also the placement of protective stop orders on new and existing positions – at just below the prior resistance (now anticipated support) level.

For “short” traders the support / resistance phenomenon may also operate in reverse whereby a prior support level (through which the price is unlikely to fall) becomes a new resistance level (through which the price is unlikely to rise).