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Trading Ideas - The Resistance/Support Flip

By  Jun 3, 2010

Topics: Finance & Investing

A phenomenon that many traders miss is the tendency for resistance and support to flip following a price breakout. In other words, on the upset, when price breaks through resistance, the old resistance level becomes the new support level; and when price breaks out below support, old support becomes new resistance.

This does not always happen, but it happens often enough to provide you with valuable insights about the orderly nature of price trends -- yes, orderly. Even in a chaotic market, you can find some rare moments of predictable behavior.

The way to approach this is to assume the old resistance will become support (or old support will become new resistance) is to use that as a starting point. For many traders, breakout means breakdown, with well established trading range in shatters and no predictable means for deciding when price is moving too quickly or too far. But just draw a straight line through the old barrier, even when the breadth was dynamic. Just see where it goes and look for tests or later breakouts in a retreat pattern.

For example, let’s say price levels break out above resistance and continue strongly in the new trading range. Draw a straight line from old resistance all the way into the new territory, and assume this represents support. If prices later retreat to this level and fall back below it, you are probably seeing a failed breakout, especially if it retreats and fills gaps as part of a breakout, and this happens very quickly.

Even more interesting, what happens if price later tests the new support level but does not violate it? This means the new support should be treated as a new and permanent (for the moment at least) support level. If this occurs, you can have confidence that there is something to the flip theory.

Even with these fairly general suggestions, you still need confirmation before making any trades based on what price and trading range action appears to be doing. Rely on technical patterns, volume, and candlestick formations to confirm what support and resistance flips appear to be going through. Also look for my new FT Press book, Trading with Candlesticks. I explore this and many more patterns in price, based on candlestick trends, including reversal,l confirmaiton and even failed signals.

The flip between support and resistance is a valuable oddity in price patterns, but it only works if you use it within a confirmation policy.

Remember, no technical system is foolproof. The best you can hope for is improving the timing of entry and exit. The border flip observation is one more piece of the technical puzzle and being aware of it adds to your knowledge and timing whenever a breakout occurs.