Technical Analysis Lesson - Remorse
How can support turn into resitance and resitance turn into support?
The chart of Levi Strauss & Co. (LEVI) shows an important technical analysis lesson. Price levels that were support can convert into resistance and price levels that were resistance can convert into support.
As you can see on the chart, the $15.15 level was support for LEVI in December of 2022. Then it was resistance in June and August 2023. Now it has become support again.
Why does this happen?
It’s due to psychology and remorse. Buyer’s remorse can turn support levels into resistance and sellers’ remorse can turn resistance levels into support.
Assuming they still held it, many of the investors who bought LEVI in December 2022 came to regret their decision to do so when the price fell below $15.15 in April 2023. A number of them decide to sell…if they can get out at breakeven.
As a result, when the shares rallied back to this level remorseful buyers placed sell orders at it. In fact, there were so many of these sell orders that it formed resistance at the price that had previously been support.
Then when the price moved above $15.15 in November 2023, some of the investors who sold decided they made a mistake and vowed to buy their shares back. But only if they can get them for the same price they were sold at.
As a result, when the price dropped back to $15.15 a number of these remorseful sellers placed buy orders at the level. This large concentration of these orders resulted in support forming.
The best traders know which price levels are important. This tells them where to enter and exit positions. They don’t guess.
They let the market tell them what to do.