Introduction to Support and Resistance

When price approaches a support or resistance zone, several key scenarios can unfold, depending on the balance between buyers and sellers. Understanding these scenarios allows traders to anticipate potential price movements more effectively.

1. Rejection

A rejection occurs when the price reaches a support or resistance level but fails to break through it, leading to a reversal. For instance, at a resistance level, traders who bought at lower prices might start selling to lock in profits, while new traders may open short positions, expecting the price to fall. If selling pressure outweighs buying pressure, the price will be rejected and start falling from the resistance level. The opposite occurs at support, where buying pressure exceeds selling pressure, causing the price to rise.

• Trader’s Tip: Rejection is often confirmed by candlestick patterns such as shooting stars, doji, or engulfing patterns, which signal that the market is reversing direction. Traders should watch for these patterns before entering trades and may consider placing stop-loss orders just beyond the support or resistance levels to manage risk.

2. Breakout

A breakout happens when the price decisively breaks through a support or resistance level, often leading to a sharp price movement. At resistance, a breakout occurs if the number of traders willing to hold or open long positions outweighs those selling or shorting. This leads to a surge in price as traders who bet against the resistance are forced to cover their positions (i.e., buying to exit shorts), pushing the price even higher. Similarly, when price breaks below support, it signals that selling pressure is overwhelming buying interest, triggering a downward move.

• Trader’s Tip: Watch for high trading volume during a breakout, as this confirms that the breakout is likely to sustain. False breakouts, where price quickly reverses after crossing support or resistance, can trap traders. Therefore, it’s crucial to ensure that the breakout is supported by momentum, indicated by increased volume or follow-through price action.

3. Consolidation

Consolidation occurs when the price stalls near a support or resistance level, moving sideways within a tight range. This period of indecision indicates that buyers and sellers are in relative equilibrium. Traders holding long positions might be hesitant to sell, while others are waiting for a clearer direction. The market may consolidate for some time before making a decisive move in either direction.

• Trader’s Tip: During consolidation, price tends to form chart patterns like triangles or rectangles, which can help traders anticipate the next move. A breakout from a consolidation pattern typically results in a sharp move, as traders react quickly once the price escapes the narrow range. The longer the consolidation, the more explosive the breakout can be, so traders should be prepared for heightened volatility once the price breaks out.