The Basics of Chart Patterns - Support and Resistance in Flat Base

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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.

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