[AgeKay]

I see this way too often to deny its significance. Support becomes Resistance and Resistance turns into Support, especially after day's high/low breakouts. It's so accurate (to the tick) that it's scary. I am wondering why that is happening.

Two reasons that came to my mind were the following, but both aren't terribly convincing:

a) traders that went long at the support try to get out break-even or with a small loss, that's why they keep selling at the previous support, effectively making it resistance.
b) traders know that other traders went long at the support and want to prevent them from profiting so they sell at that price, knowing that long traders have to sell eventually.

I hope one of you has a better explanation.

[garak]

Both is true in my experience. a) is a common technical explanation that derives from the traders' psychology caught on the wrong foot whereas b) is a self-fulfilling prophecy other traders use to get into the market.
The whole phenomenon is akin to value area trading where you look at historical bid/ask volumes and take em as S/R.

[Kiwi]

The reason it can be accurate to the tick is that people know its likely to be accurate to the tick in that market. I trade in markets like that but also in markets that never reach it in a strong move and markets that usually break it by 5-10.

So, the basics are:
- people who wanted to get short wait as long as possible and the big guys scale in as price is retracing back to the break point
- people who are long and big scale out as price pulls back to the break point
- if the market is very strong or has typical behaviour then the observant money knows its not likely to get further than xxxx so thats as far as they wait
- when it starts to move away from that point and down again, even a few ticks perhaps, those who, hopefully, waited to see if it might break through this time give up and jump on it.

Crowd behaviour in a repeating scenario.

[wjrusnak]

Take away the indicators, the moving averages, and the colored bars. In fact, take away the bars and the entire idea of a graphical representation and what are you left with? A price. A value placed upon some underlying object (or paper, or contract), determined by who will or will not pay a particular amount for it. That is it. Nothing more or less. Adding to that, sometimes humans like to keep things simple, especially with numbers (i.e. rounding to the nearest whatever, treasury notes-- $1, $5, $10, $20, $100, etc.). With that in mind, would it not be understandable that if a price provided resistance, that it would also provide support?

Let me provide just one example (certainly not applicable to every situation by any means). One man eyes up stock XYZ for months and notes each day what happened with its value. He notices over a number of weeks that the price of the object ranged from 11.50 to 13.50. It never seemed to get lower than 11.50 or higher than 13.50. Out of no where, he wakes up to find that the price had broken above 13.50 to 13.72. Obviously from what he's witnessed over the past few weeks, he knows that this price is "expensive" for the stock, so he waits. Eventually price gets back to 13.51 and he decides its the right time to purchase some shares. Why? Well, the stock is obviously worth more now, otherwise it would not have broken above 13.50. Why 13.50? It was so important for weeks to the sellers, so why wouldn't it have significance now for someone buying? In addition to that, most of us here know that what I just described was a perfect breakout and retracement trade. Many people don't like taking breakouts because of the numerous amounts of fake-outs, so they wait for price to get back to the area in which is broke. If enough people do this, it will be obvious on the chart, hence your R becoming S.

But, keep in mind, there are millions of people with more than one reason to buy or sell at a certain price. My only true explanation of why S becomes R is because S/R end up being "markers" for people who are buying and selling. "I'll sell everything if we get to 20 and buy more if it comes back to 10"

Below is a chart of GLD with a few levels, in which almost every one acts as both S and R. Price moves in waves that are part of bigger waves. Overall the trend is up, but the waves keep flowing from range to range (keeping to numbers that make sense... numbers that are familiar from hours ago or days ago). Then the quicker buyers (and sellers) decide to exit the range (that GLD is worth more), the stronger (steeper) the trend line gets, flowing from S to R and back again. Maybe what we'll see is that price will find R really soon and retrace back to just above 112. At that point, buyers may "remember" the level and start loading up on shares from the satisfied sellers (or excited short-sellers) that have been dumping their shares on people since the high.

I hope this helps to paint the picture of what is happening and how interesting it is. We're graphing human emotion playing out in a series of buy and sell orders at specific price markers that seem to repeat themselves for psychological reasons.

EDIT: Also, I highly recommend reading DbPhoenix's write-up on this topic.

[deanz]

Why Does Support Turn into Resistance and Vice Versa ?


That's a good question... here are some more ideas:

One reason why price may break support and not come back to it..... If you had enough money to move the market, where is a good place to go short in a big way...... well one place is at support, where Joe Public is exiting his short (with a long) and Joe Smarty is entering a new long because.... it's support you know, so there are plenty of people to take the other side of your large short.

One reason why price breaks support, travels a ways down, returns back up to old support before going down again is ..... Joe Public sees the tide has turned and an obvious short, and someone wanted to take the other side of all those shorts ..... either to exit a previous short, or to enter a new long.

.

[AgeKay]

Thanks for all the responses so far, I really like some of the explanations. Just so you know, I trade very short-term, I don't even look at yesterday's chart, so if you talk about days and weeks, I can't really relate to that. The "markers" explanation by wjrusnak is one of the best explanations though, in my opinion.

[BlowFish]

An interesting question. Another way of viewing things is from a more market microstructure type view. Markets exist to facilitate trade. They are systems to match sellers with buyers. The behaviour of markets in general and price in particular can be viewed as a search for liquidity. The reason that these areas are visited and re visited is that they are areas where liquidity (orders) might be found.

[ZOSO]

In my opinion, which is not going to be very popular here, support and resistance are convenient ways to describe price movements by traders who need the comfort of an explanation for the logic behind their decisions to buy or sell.

Not much different than stereotyping the behavior of certain classes or races of people when they engage in certain behaviors.