Price Patterns / Chart Patterns Part 2

When the price rises to resistance area. The word resistance is used because at this point the index shows opposition to a further price rise. When the demand/supply relationship comes into balance at resistance area, the market quickly turns in favor of the sellers because prices react. This temporary reversal may occur because buyers refuse to pay up for a security, or because the higher price attracts more sellers, or for both of these two reasons. The important fact is that the relationship between the two groups is temporarily reversed at this point.

Following the unsuccessful assault on resistance area, prices turn down until a support level is reached. Just as the price level at resistance area reversed the balance in favor of the sellers, so the support level alters the balance again. This time, the trend moves in an upward direction because at support level prices become relatively attractive for buyers who missed the boat on the way up, while sellers who feel that the price will again reach resistance area hold off. For a while, there is a standoff between buyers and sellers within the confines of the area bounded by resistance line and support line. Finally, the price falls below support line, and a major new (downward) trend is signaled.