Resistance Zones
During declining and neutral market trends, resistance zones are likely to develop in areas in which there have been previous market trading, areas that have halted price advance in the past. How might a resistance zone develop? Well, suppose that a market advance has just come to an end, taking a particular issue down from a new high in price of $50 to a price of $44. There are likely to be many investors who regret not selling in the $49 to $50 zone, waiting and hoping for a second opportunity. If the issue recovers back to the $49 to $50 area, many of these investors, recalling that $50 was the last high, will offer shares for sale, perhaps driving the issue back down in price.
In this sequence, a “trading range” might develop between $44 (the most recent low for the stock, perhaps perceived as a buy zone) and $50 (the most recent high), perhaps perceived as an expensive area for that issue. The price of $44 to $45 will represent a support zone. The $49 to $50 area will represent a resistance zone.
If prices break down below $44 to $45say, to $37 to $38–the former support zone of $44 to $45 is likely to become a new resistance zone. There will have been many buyers at $44 to $45 hoping and looking for a return to their buying level for an opporhlnity to achieve a break even on their investment. These investors, among others, represent a source of ready supply in that resistance zone of $44 to $45. Conversely, if the stock penetrates the $50 level, moving perhaps to $55 to $56, that old resistance zone at $49 to $50 could become redefined as a favorable buying zone rather than a likely selling zone. The former resistance area will become a support zone.
These are significant concepts. When a support area is violated to the downside, the former area of support frequently becomes an area of resistance. When a resistance area is penetrated to the upside, this former area of resistance is likely to become an area of support.