How Resistance Turns into A Support?

Jul 16, 2022

Hi
You must have often heard that a resistance once taken out could act as a potential support level. Let us see through this chart how this happens.

Firstly there is a strong resistance zone on the left bottom of the chart, which is also 2019 high. Price took a knee jerk reaction from that level. Many traders would have bought near the highs in a bull market but now they are sitting in a loss. They would be thinking that as soon as the price comes back to their average price or cost, they would exit/sell.

1. Finally after the sharp bear phase, price rallies back to the 2019 highs. Now the above traders/investors would start selling at cost. Many new traders who think that price is at resistance would also start shorting (selling). Those who bought at lower prices would also try to book profits. So there is a flux of sell orders at that level. But wait! is that true?

2. Selling is there but buy orders are just overwhelming. Buyers are absorbing all the supply and managed to hold the reaction of selling. Or you can say that seller were not strong enough or buyers were stronger. If sellers are not strong and buyers are strong then what would happen? Tell me..... Yes you are right, the price would rally higher. And it did.

3. Now all those seller who acted at stage 1 would be shocked and want to book their loss at a better lower price. There are others who still think that this stock is weak and the BO is fake, so they start shorting. Price pulls back to the 2019 highs.

4. Now stage 1 sellers have a better opportunity to cover their loss, so they start buying. Left out buyers also start buying due to better bargain. Pullback buyers enter the market. This large flux of buying orders pushes the price higher and the rally resumes.

5. In this way, the prior resistance turns out to be a support for the stock.

This same psychology repeats at 6&7 where price holds previous resistance as a support.

Imho, Its always beneficial to see any market or chart from psychological point of view rather than merely patterns and signals. The same market psychology is true for how a support once broken, turns into a resistance.

Thanks for reading. I hope it would be useful.
Regards