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2010issue C0363

Support and resistance as falsifiable chart hypotheses

Chart support and resistance are presented as subjective overlays, not as a formula for where price must react. Fibonacci retracements, trendlines, and market channels then compete as ways to mark structure, but adding enough lines can make a later bounce look planned.

  • Support and resistance are presented as subjective, with no simple formula for the size or location of a level.
  • A common Fibonacci retracement marks potential support and resistance near 23.6%, 38.2%, 50%, 61.8%, 76.4%, and 100% of a prior price move, most coherently from major peaks and troughs.
  • Adding enough geometric lines can make later reactions look planned, because price is likely to meet at least one of them.
  • Trendlines and market channels are presented as a simpler alternative for locating key structure than dense geometric overlays.
Entries in this reading3 entries
Fibonacci retracement97 readingsCurrent trackTrendline128 readingsSupport and resistance170 readings

Subjective support and resistance

Chart measures of support and resistance are presented as subjective, with no simple formula for the size or location of a level. Resistance is defined as the price at which buyers become reluctant to add new longs and short sellers believe they have an edge.

Support is a price area where buying previously absorbed selling. A later test can be stated as a long hypothesis until a clean break invalidates it. Resistance is a price area where selling previously capped an advance, and a later test can be stated as either a fade or a breakout hypothesis.

A price area one participant treats as resistance and a reason to sell can be treated by another as a potential breakout.

Retracements from major peaks and troughs

A common retracement method marks potential support and resistance near 23.6%, 38.2%, 50%, 61.8%, 76.4%, and 100% of a prior price move. Retracement overlays are described as most coherent when drawn from major peaks and troughs.

A continuous monthly S&P futures swing from about 1590 to about 670 is used to illustrate retracements at 893, 1027, 1135, 1244, and 1378, with a full retrace near 1590. Those calculated prices are described as candidate resistance on the way up that can become support if penetrated. That later role change is the support-resistance flip.

S&P futures Fibonacci retracements from the 2007–08 swing

From the October 2007 high near 1590 to the March 2008 low near 670, the column gives the five interior Fibonacci retracement prices a trader would mark as competing resistance (then support if broken). Those levels come from the article’s own arithmetic, not from reading the attached portrait.
From the October 2007 high near 1590 to the March 2008 low near 670, the column gives the five interior Fibonacci retracement prices a trader would mark as competing resistance (then support if broken). Those levels come from the article’s own arithmetic, not from reading the attached portrait.S&P futures (continuous monthly) · monthly · 2007-10-01T00:00:00.000Z to 2008-03-31T00:00:00.000Z

The 100% retrace is the prior high at 1590; the attached image is a column portrait and is not the source of these prices.

Overplotting versus simpler structure

Adding enough geometric lines to a chart can produce the appearance of repeated support-and-resistance reactions because price is likely to meet at least one of them. That is overplotting: so many lines that some later reaction is almost guaranteed, which makes the overlay look accurate after the fact.

Drawing trendlines and market channels is presented as a simpler alternative for locating key structure than dense geometric overlays. A trendline is a straight line joining successive swing highs or lows to describe directional structure and possible reaction zones. A market channel is a pair of roughly parallel trendlines that bound an advance or decline and give both a path and an opposite-side reaction zone.

Mathematical geometry is contrasted with using observed historical market tendencies, on the grounds that a formula cannot predict participant behavior.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
45 of 53 in the Trendline track
201264-73 pp.Next on TrendlineReading a 2012 software directory as a breakout and channel case studyWrite a hold, fail, or retest hypothesis on a trendline or support-resistance level before opening a software directory.
All readings on this track · 53 readings
  1. 1984Constructing the slow stochastic from a five-session range
  2. 1985Gold-proxy trendlines and a January support base
  3. 1988Construct a five-week new-highs total as a breadth chart
  4. 1988Stacked channel, trendline, and moving-average warnings in 1987
  5. 1989Auditing fifth-wave counts with equality, Fibonacci, and trendlines
  6. 1990Money-fund maturity as a companion Eurodollar chart
  7. 1990Constructing wave targets from ratios, triangles and trendlines
  8. 1992Nested time frames for trend and channel signals
  9. 1992A pre-trade checklist for trendline breaks and loss limits
  10. 1992Bond-fund timing inside trendlines, retracements, and dual averages
  11. 1992Two-point trendline construction from rise over run
  12. 1993Disposable chart ratings from confirmed level tests
  13. 1993When trend channels define fair value after dislocations
  14. 1993Valid trendline anchors for three-part reversals
  15. 1994Pairing stochastic divergence with trendline invalidation
  16. 1995Constructing measured targets after trendline breaks
  17. 1997A three-part pullback plan with RSI, Fibonacci retracements, and a tight trendline
  18. 1998Rule-based Trendline construction for testable entries
  19. 2000Constructing trendlines, breaks, and role reversal
  20. 2000Constructing speed resistance lines from trend extremes
  21. 2000Nasdaq tech cycle stages with a 15-day average and trendlines
  22. 2002Two-session candlesticks that test support, resistance, and trendlines
  23. 2002Constructing Fibonacci ratio grids from a peak and a trough
  24. 2002Evaluate trendline geometry before trusting a breakout
  25. 2002Trendline, volume, and breakout hypotheses versus cycle-end stories
  26. 2003Writing the long S&P 500 trendline and cycle junction as one hypothesis
  27. 2003A three-event trendline reversal checklist
  28. 2003Reverse-engineered Relative Strength Index price curves
  29. 2003Two-anchor trendline construction without cut-through
  30. 2004Treat a 15-minute e-mini stair-step as congestion under a daily lid
  31. 2005A 50-day average, a trendline break, and an open barrier flip
  32. 2005Matching a forty-day average to a crude trendline
  33. 2006Constructing a relative spread-strength oscillator for staged cycle confirmation
  34. 2006Constructing a log-change probability line for trend and range rules
  35. 2007Linked cross breaks as dollar-pair filters
  36. 2007A case study in support, resistance, and trendline role reversal on currency charts
  37. 2007Reading trendline breaks in a housing-sector case
  38. 2007Constructing replaceable trendlines for break signals
  39. 2007Reading trendline breaks before the mechanical signal
  40. 2007Trading choppy forex trends with channels and Fibonacci breaks
  41. 2007A stacked hypothesis from wave, trendline, ratio, and candle
  42. 2008Exit rules before entry: trendline, support, and stops
  43. 2008Capitulation headlines need trend confirmation
  44. 2008RSI divergence classes, ratio thresholds, and trendline tests
  45. 2010Support and resistance as falsifiable chart hypotheses
  46. 2012Reading a 2012 software directory as a breakout and channel case study
  47. 2013Treat a currency position as a regime, then map shared levels
  48. 2014Evaluating trendline swing size per market
  49. 2018Intermarket regime stress and the January 2018 trendline break
  50. 2018Weekly and daily Stochastic oscillator construction on a single daily chart
  51. 2018Constructing trendlines, support, and breakout targets from crowd exits
  52. 2019Trendline break and Fibonacci retracement as a falsifiable outlook check
  53. 2019Monthly S&P 500 false-break versus the decade trendline
By fieldTrend and channels181 readingsBy year201075 readings
All 128 readings tagged Trendline
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