Strength of Support and Resistance
A congestion area that has been hit by several trends is like a cratered battlefield. Its defenders have plenty of cover, and an attacking force is likely to slow down. The longer prices stay in a congestion zone, the stronger the emotional commitment of bulls and bears to that area. When prices approach that zone from above, it serves as support. When prices rally into it from below, it acts as resistance. A congestion area can reverse its role and serve as either support or resistance.
The strength of every support or resistance zone depends on three factors: its length, its height, and the volume of trading that has taken place in it. You can visualize these factors as the length, the width, and the depth of a congestion zone.
The longer a support or resistance area - its length of time or the number of hits it took-the stronger it is. Support and resistance, like good wine, become better with age. A 2-week trading range provides only minimal support or resistance, a 2-month range gives people time to become used to it and creates intermediate support or resistance, while a 2-year range becomes accepted as a standard of value and offers major support or resistance. As support and resistance levels grow old, they gradually become weaker. Losers keep washing out of the markets, replaced by newcomers who do not have the same emotional commitment to old price levels. People who lost money only recently remember full well what happened to them. They are probably still in the market, feeling pain and regret, trying to get even. People who made bad decisions several year ago are probably out of the markets and their memories matter less.
The strength of support and resistance increases each time that area is hit. When traders see that prices have reversed at a certain level, they tend to bet on a reversal the next time prices reach that level. The taller the support and resistance zone, the stronger it is. A tall congestion zone is like a tall fence around a property. A congestion zone whose height equals 1 percent of current market value (four points in the case of the S&P 500 at 400) provides only minor support or resistance. A congestion zone that is 3 percent tall provides intermediate support or resistance, and a congestion zone that is 7 percent tall or higher can grind down a major trend. The greater the volume of trading in a support and resistance zone, the stronger it is. High volume in a congestion area shows active involvement by traders - a sign of strong emotional commitment. Low volume shows that traders have little interest in transacting at that level - a sign of weak support or resistance.
A congestion area that has been hit by several trends is like a cratered battlefield. Its defenders have plenty of cover, and an attacking force is likely to slow down. The longer prices stay in a congestion zone, the stronger the emotional commitment of bulls and bears to that area. When prices approach that zone from above, it serves as support. When prices rally into it from below, it acts as resistance. A congestion area can reverse its role and serve as either support or resistance.
The strength of every support or resistance zone depends on three factors: its length, its height, and the volume of trading that has taken place in it. You can visualize these factors as the length, the width, and the depth of a congestion zone.
The longer a support or resistance area - its length of time or the number of hits it took-the stronger it is. Support and resistance, like good wine, become better with age. A 2-week trading range provides only minimal support or resistance, a 2-month range gives people time to become used to it and creates intermediate support or resistance, while a 2-year range becomes accepted as a standard of value and offers major support or resistance. As support and resistance levels grow old, they gradually become weaker. Losers keep washing out of the markets, replaced by newcomers who do not have the same emotional commitment to old price levels. People who lost money only recently remember full well what happened to them. They are probably still in the market, feeling pain and regret, trying to get even. People who made bad decisions several year ago are probably out of the markets and their memories matter less.
The strength of support and resistance increases each time that area is hit. When traders see that prices have reversed at a certain level, they tend to bet on a reversal the next time prices reach that level. The taller the support and resistance zone, the stronger it is. A tall congestion zone is like a tall fence around a property. A congestion zone whose height equals 1 percent of current market value (four points in the case of the S&P 500 at 400) provides only minor support or resistance. A congestion zone that is 3 percent tall provides intermediate support or resistance, and a congestion zone that is 7 percent tall or higher can grind down a major trend. The greater the volume of trading in a support and resistance zone, the stronger it is. High volume in a congestion area shows active involvement by traders - a sign of strong emotional commitment. Low volume shows that traders have little interest in transacting at that level - a sign of weak support or resistance.
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