TRADER’S REMORSE

Following the penetration of a support/resistance level, it is common for traders to question the new price levels.

The price action following this remorseful period is crucial. One of two things can happen. Either the consensus of expectations will be that the new price is not warranted, in which case prices will move back to their previous level; or investors will accept the new price, in which case prices will continue to move in the direction of the penetration.

If, following traders’ remorse, the consensus of expectations is that a new higher price is not warranted, a classic “bull trap” (or “false breakout”) is created – Fig 2.

Similar sentiment creates a bear trap. Prices drop below a support level long enough to get the bears to sell (or sell short) and then bounce back above the support level leaving the bears out of the market – Fig 3.

When a resistance level is successfully penetrated, that level becomes a support level. Similarly, when a support level is successfully penetrated, that level becomes a resistance level – Fig 4.