The Action At Support And Resistance http://www.netpicks.com/the-action-at-support-and-resistance/

I mentioned in another trading tips article that a "that's different" look to

the chart can set you up for some great trading opportunities.

In a nutshell, a move that is different from the action that came before it is a

clue that for whatever reason, renewed interest in the instrument

you are looking at, has occurred.

This can set you up with a trend move or a mean reversion trade. Regardless of which it is, looking for moves that

are different is not a bad way to get set to make a trade.

One area people look for moves is around support and resistance. I've mentioned support and resistance

before but basically I look for obvious areas as "hidden areas" don't really

attract the masses.

You can also expand your thinking to include ranges that have prices moving

back and forth between the support/resistance extremes.

The question you should always be asking is will these support and

resistance zones hold price or will they fail and either keep moving or simply

expand the range?

There is a rather simple way to be clued into the probable hold or fail and that is the rejection, or lack thereof, at

the extremes.

What would you expect to happen to price if a support or resistance zone

was going to hold?

I would expect price to move away soon after testing the zone.

Side-note: "Soon" is relative to the time frame.

This chart is a daily chart of an instrument and we've been in an

uptrend on this time frame for about two months. We have been in a range where the support and resistance zone

has been defined. The higher time frame is also in an uptrend.

1. Shows a sound rejection of the lows of the range. While the recent past

has shown tests of the lows, this test leaves no mistake that buyers stepped

in quite strongly at this point. I find these types of rejections to be a

"that's different" than I've seen in the previous price action.

2. We did see an expansion of the range marked with the green arrow and while not perfectly visible, the

candle labeled 2 has a closing price at the same level as the previous

resistance zone.

Even more telling, even though there was an expansion, the candle was

certainly in line with the other green candles and the solid red candle

solidly ended that bulls run at that point.

This chart is a lower time frame of the same area and a day before the strong

rejection of price from the support zone. The horizontal line indicates the

area that was acting as support and you can see with the aid of the black line how forcefully price pulls away

from that area.

You can see: A. Test of the support zone, price pulls away. B. Price breaks lower and is turned away C. One more test and as indicated by the line, price sharply turns.

Remember the green candle that expanded the range?

Here is an inside look of that day.

FR is the former resistance and as price breaks that: A. Price sharply turns from the new high B. Indicates the retest and sharp rejection at new high

Not shown on this chart but price ranges with little interest the rest of the day and it rapidly dropped the following day printing a beautiful

momentum candle.

Do you think the strong momentum to the downside enticed those that trade

breakouts?

Price expands the range and then drops the following day to the bottom

of the range with an obvious momentum candle. Breakout traders read that has bear strength and are

waiting for price to slam out the bottom of the range.

As we saw in the first chart, they were disappointed as price does break the

zone but strongly rejects at lower prices trapping shorts and forcing

them to exit that helps propel price back to the resistance zone of the

range.

What happens when price returns to resistance?

Looking back at the first chart and the

number two candle, we see price break to new high, reject but holds at

the close of the previous candle in what many call a doji candle.

Taking a micro view of that daily doji: A. Breaks back below the previous close to the previous resistance zone and is soundly rejected. B. After making a high, price pulls back to the previous close and as shown by the black line, chops around on top of

resistance.

Can there be any doubt that price will rocket the next day?

Yes, there can be a lot of doubt but in trading, we think in probabilities. The price action highlighted by the black line shows that rejections of

levels usually results in price moving away soon after arrival.

When the probabilities of the test being successful increases, we

generally see price consolidating at the extreme.

The last chart showed something even better and that was the sharp

rejection away from the longer held resistance zone when price dipped

back inside. We also never saw price move too far way from the support zone when that zone broke and that

should be a heads up as well.

The trading chart tells the story and unfolding price action around key

areas of the chart can alert you to the probability of one thing happening

over another.

As hundreds of hours in front of the charts pass you by, you will see the

weak and the strong play out and will begin to hopefully be able to plan

trades off the probability of X over Y happening.

Start today by marking off obvious areas of support and resistance and then drill down to the price action around those levels. Experience is

always the best teacher.