Page 133 - THE MARKET WHISPERER

THE MARKET WHISPERER 13 1

• The area of support is the price where the stock stops on its way down:
in other words, the point at which buyers outnumber sellers.

• The area of resistance is the price where the stock has stopped on its
way up: in other words, the point at which sellers outnumber buyers.

Summary:
In the support area, the majority think that the stock’s price is cheap.

In the resistance area, the majority feel that the stock’s price is
expensive.

Professional traders seek to buy a stock on the way up after it breaks
through the area of resistance, and will seek to short (sell) when a stock
breaks through the area of support.

I want to emphasize that these are areas, not lines, of support and
resistance. The term “line” represents a rigid, unfeasible reality. Is it
reasonable that all people active in the market will constantly buy at
the same support price and always sell at the same resistance price? Of
course not. This is even truer for a large market. Additionally, as noted,
the principles of technical analysis are known to all people active in the
market, and frequently “lines” will be broken out purposely in order to
execute automatic buy and sell orders fed into computers, or to tempt
innocent traders into buying and selling a stock.

When Support Turns into Resistance, and Vice Versa

• When an area of resistance breaks out, it turns into an area of support.
• When an area of support breaks down, it turns into an area of resistance.

Let’s examine this rule using the following charts and try to understand
how the rule operates:

Resistance – Turning into Support