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Thursday November 20, 2008 |
Support
and Resistance in a Flat Base
In the real world of price dynamics levels that had proven to be resistance become excellent
support once they are violated (and vice versa). This
occurs because those who were merely trying to close the position
without suffering a loss are systematically replaced with
investors committed to that price. Often these new investors
will be characterized as having "strong hands" but make
no mistake, the characterization says little about their physical
attributes. Their hands are strong because their commitment
to the stock is new. Should the stock fail to
perform as anticipated, their commitment will wane (and their
hands become less strong). Let's take a look at a recent example
of this phenomena at work for Adobe Systems (ADBE).
Like
so many technology stocks, Adobe Systems had a tumultuous fall
from grace following a big rally into March of 2000. After
finding a low in the middle of March 2001 the stock began the
process of retracing some of the year-long losses. The stock
rallied from the low at $25 in the middle of March to a high of
$38 at the end of that same month before willing sellers
emerged. On two separate occasions the stock rallied to this
resistance level at $38 only to falter but in early April volume
swelled and Adobe Systems gapped-up through the $38 level on
impressive volume. This level now became support because
willing sellers at $38 had been replaced with willing
buyers. After "breaking out" from this
consolidation pattern the stock immediately began trending higher,
rallying to $48.50 before sellers emerged again. Through the
remainder of April, May and June Adobe Systems was mired in a
large and very clearly defined consolidation phase with support at
$38 and resistance at $48.50. Resistance is labeled with red
arrows and support is labeled in green.
Now
let's take a look at the way support and resistance levels work in
the context of a longer-term downtrend.
support
and resistance 
support and resistance in a
downtrend
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