Support and Resistance Part 2

Tom Gentile

Posted in
Technical Analysis

By: Tom Gentile
April 12th, 2024

4 mins read

Did you miss Part 1? Catch up here.

I wrote a Part 1 article last week educating all who read the article a chart pattern in technical analysis called Support and Resistance. I am realizing that I could actually author numerous articles on support and resistance as there are various pattern where one can see that on a chart.

There are times support and resistance forms in a sideways, up, or down fashion.

There are times a security trades between a support and a resistance. There are time where old resistance becomes new support (and vice versa). There are times where support and resistance is formed on moving averages, Fibonacci, and other indicators.

I am going to write a Part 2 technical analysis piece, but if you see more education on this style of technical analysis in the near future do not be surprised.

Old Resistance, Becomes new Support

Last week the lesson was how to trade the security and or the option when a security trades inside a channel establishing a support and resistance price area.

This week I am going to focus one attention on what may happen when a security breaks out of that channel of support and resistance.

Take a look at Figure 1 on Levi Strauss & Co. (NYSE: LEVI)

300-day OHLC Chart on Levi Strauss & Co. (NYSE: LEVI)
Figure 1: 300-day OHLC Chart on Levi Strauss & Co. (NYSE: LEVI)

In the chart I have placed a horizontal, green line indicating a resistance price area for LEVI.

That price area or level is $15. That is the price for LEVI has resisted going higher. Even though it has tried for a day or two it fell back down in price (many times it fell back to a $13 support price area).

In Figure 1 bullet 1 shows $15 as resistance. Bullet 2 shows LEVI broke out above the $15 price, but this time it stayed above it for more than a couple of trading days.

I am taking off the yellow box from Figure 1 to show you what LEVI stock price did after it not only broke out above the $15 resistance but dribbled back and tested $15 as a new support price area.

Change in Polarity

The pattern of Old Resistance becomes New Support is what is also known as a Change in Polarity.

This principle says whenever resistance is broken, its role is reversed, and it begins to act as a new support. It works in the reverse where at times an Old Support become New Resistance. 

Change in Polarity on LEVI
Figure 2: Change in Polarity on LEVI

How often does this happens and how long does it take on average for a stock to test one level as one classification and reverse to the other isn’t so easily quantifiable and even then it will differ from security to security.

It is a beautiful thing when it happens, though.

It’s when this change in polarity happens when I and others can consider an option trade.

Figure 2 shows this pattern playing out. Rather than seeing the sec

Assessing a Future Stock / ETF Price Move

Primarily I am an options trader. But even options traders need to have, first and foremost, a gauge on where the underlying security may go in price to then be able to research the options and what they may do with that expected price move.

Price Target Assessment and Mission Accomplished on LEVI
Figure 3: Price Target Assessment and Mission Accomplished on LEVI

Once  a security produces the formation of Old Resistance becoming New Support a means to assess a potential future price move for technicians is to take the width of a trading range that preceded this setup and expect a move that same price width amount in the direction of the break and FROM the price of the break.

In the example with LEVI the stock broke out of the $15 price, came back down, and tested $15 as support and started higher.

Since the range that preceded this current price action was a trading range of 2-points ($13 support to $15 resistance), one can expect a 2-point move higher.

And since I said to expect that price move from the price of the break, which in this case was $15, one could tack on an expectation of a 2-point higher move from $15 taking LEVI up to $17.

There is no guarantee, but it does at least provide a trading plan with an established expectations for the trade for profit.

As for loss protection one can use a technical viewpoint in that if the breakout fails and Levi comes back under the $15 price that could be where one stops out.

Figure 3 shows that the price expectation of $17 did indeed happen.

As stated there is no guarantee this type of price action plays out, but it sure is sweet when preparation and anticipation of Old Resistance becomes New Support (and vice versa) works.

Tom Gentile
C1P: Chief 1-Percenter

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