Polarity = Former Support Turns Into Resistance

Mr. Edwards & Mr. Magee laid it out perfectly for us over 60 years ago:

“…here is the interesting and the important fact which, curiously enough, many casual chart observers appear never to grasp: these critical price levels constantly switch their roles from Support to Resistance and from Resistance to Support. A former Top, once it has been surpassed, becomes a bottom zone in a subsequent downtrend; and an old Bottom, once it has been penetrated, becomes a Top zone in a later advancing phase.”

This is technical analysis 101 guys. You can complicate things if you want, but all of those patterns with fancy and creative names all stem from the statement above. It’s technical analysis, but it’s a little bit of common sense too. Think about it: we know that there were S&P500 buyers here in March and buyers here in June. Do you know why the market got crushed after breaking below this level? Because the buyers ran out. Anyone willing to buy at this price had already bought, leaving only sellers. So if we know that there are only sellers left at this level, should we be surprised that the market is rolling over here? Of course not.

Now does this mean that we can never break above here and take off even higher? No. But I think that some selling here should be expected and it should take more than one attempt before penetration of the mid to high 1200s.

On the flip side, key resistance towards the top of that 3 month range was broken a couple of weeks ago. This broken resistance should become some support on any retests. I don’t think that we should be surprised to find buyers in that area if the market gets down there. With a rising 50 day moving average currently catching up with price, we could have some nice risk/rewards set up pretty soon. Be patient, let the market come to you:

 

Source:

Technical Analysis of Stock Trends – 8th Edition (Edwards & Magee)


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