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The phrase “resistance becomes support” has been taught, traded and no doubt even argued by many a trader over the years. The time-honored theory holds that markets will often find support at levels they once struggled to overcome. Anyone who has built a friendship or relationship through overcoming differences would probably agree that these are among the strongest bonds. The same dynamic applies to price levels.
This rule can help us in a variety of situations, notably while trading the end of retracements. In our style of Elliott Wave Trading, the main retracement pattern we trade is the move from 4 to 5. Chart 1 below illustrates one of these set-ups, in which Westpac Banking Corp (WBC: ASX) has been retracing away from a new high, labeled 3.
Chart 1 - WBC Daily Wave 4 Up Count
click chart for more detail
Moving the chart up a little to reveal more price action, we find that the current Wave 4 move has at least paused at a level that provided significant resistance twice in the recent past, before being broken. Looking back to October 22nd, we can also see WBC has found support near this level recently and is now forming a double bottom.
Rather than expecting prices to stop exactly on the prior high or low all the time, it is important to use a leeway margin of a few points on either side – especially when there are multiple tops at similar levels.
Chart 2 - WBC Daily Wave 4 Up Count
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The same can be applied in reverse, thus the familiar expression “resistance becomes support and support becomes resistance.” Old highs will support new lows; old lows will resist new highs.
The example in Chart 3 shows Ryder System Inc (R:NYSE) and a current Wave 4 in a downward count. Similar to WBC, Ryder has found resistance at a point where it found support on two previous occasions. This is another good example of how these levels are seldom exact. The red line on the chart is drawn as a rough average of the two lows and the current Wave 4 high should be used as such. While pinpoint accuracy in forecasting has been proven possible, trying to time markets to the tick on a daily basis is a losing game.
Chart 3 – R Daily Wave 4 Down Count
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In numerous articles I have spoken about the value of "clustering" within the same method of analysis or a variety of methods. Resistance becoming support is no different and works best when clusters can be found.
In these uncertain and volatile times, it is important to find trade set-ups that are likely to hold and offer significant price movement. Ensuring a market has strong support (or resistance) behind it is vital for successful retracement-based trading.
Happy Trading
Jordan Craw
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