For example, the abovefigureshows an instance where a resistance level turns out to be a support level prior to returning to a resistance level after a series of breakouts. The strength of trendline as well tends to become greater over time considering the number of rebounds. However, the importance of these role reversals is often misjudged by traders, who eventually fails in realizing the number of times they occur.
Stock will always have both support and resistance level and before breaking out higher or lower, a stock is likely to trade in between them. The breakout is expected to alter the trendline that was broken into the opposite role and a new price channel will be initiated.
Support and resistance levels are a crucial aspect of trend analysis as they often help in making trading decisions and also in recognizing the trend and when it is supposed to reverse. These levels also assist in observing and confirming the trends, ongoing as well as upcoming, hence traders involved in the technical analysis should look for these levels. As long as the price remains between two levels, it is supposed to move in the same direction.
However, a break beyond support or resistance does not always imply a reversal. For example, a breakout higher may lead to a bullish trend and vice versa in case of a breakdown below trendline support.
Traders should be well aware of support and resistance levels and as these points are usually classified by volatility, traders should avoid settling orders at these major points. If traders are willing to place an order near these levels, making orders directly at these levels should however be avoided as they are rarely reached. This happens because of the price that never reaches the whole number. Moreover, to exploit on a breakdown or breakout, traders can place short selling around these levels.