Page 72 - A Complete Guide to Volume Price Analysis: Read the book then read the market

Fig 7.10 Support & Resistance

The analogy that I always use to explain this type of price action is that of a house, with floors and ceilings, which I hope will help to fix this more
vividly in your mind's eye. What is happening in the schematic in Fig 7.10?

To begin with the price has fallen, before reversing higher, only to fall back again, before reversing higher again. This zig zag price action is
repeated over and over again, and as a result, has created the 'channel' of price action with peaks and troughs as shown on the schematic. This
oscillating price action creates what we call the floor of support and the ceiling of resistance. Each time the price action comes down to the floor, it
is supported by what appears to be an invisible cushion. Not only does this help to prevent the market from falling further, but also helps the price to
bounce higher.

Once the price has bounced off the floor of support, it heads back towards the ceiling of resistance, where an invisible barrier appears again, this
time preventing the price moving higher and pushing it back lower again. For any of you who remember the very first computer games such as ping
pong with the two paddles, it is very similar, with the ball, or the market in this case, bouncing endlessly back and forth between the two price levels.
At some point the price will break out from this region.

However, before moving on there are several points I would like to examine and the first, and perhaps most obvious is, why is this price action so
important. Therefore let me try to address this issue here.

Suppose for a moment that the price action in Fig 7.10 is taking place following a long bullish trend higher, but that this is NOT a selling climax.
What is actually happening in this scenario?

First the market has moved higher, buyers are still buying into the trend, but then the price reverses, and moves lower. The buyers are trapped at
this higher level, and are now regretting their decision. They are trapped in a weak position. The market moves lower, but then starts to move higher
again, as buyers come in at this lower level, fearful they may miss out on another leg higher in the trend. As the market approaches the first reversal
point, those buyers in a weak position, sell, glad to exit with a small loss or at break-even. This selling pressure sends the market lower, away from
the ceiling level, but with a second wave of buyers now trapped in weak positions at this higher level.

The market then approaches the floor again, where buyers enter, seeing an opportunity to join the bullish trend, and take the market back to the
ceiling again, where the second wave of weak traders sell out, and exit with either a small loss or marginal profits. This oscillating price action is
then repeated.