Unveiling Crypto Market Insights: Support and Resistance
GM Bitstampers!
Today, we're diving deeper into the topic of identifying support and resistance levels—a subject we've briefly touched upon in our post about ranges.
Support and resistance
Support and resistance are pivotal concepts in technical analysis. John J. Murphy describes these concepts vividly in his book Technical Analysis of the Financial Markets: "The troughs, or reaction lows, are called support. The term is self-explanatory and indicates that support is a level or area on the chart under the market where buying interest is sufficiently strong to overcome selling pressure. As a result, a decline is halted and prices turn back up again. Usually, a support level is identified beforehand by a previous reaction low. Resistance is the opposite of support and represents a price level or area over the market where selling pressure overcomes buying pressure and a price advance is turned back."
The Psychology of Support and Resistance
Murphy further explains the psychological underpinnings of these areas: "The more trading that takes place in that support area, the more significant it becomes because more participants have a vested interest in that area. The amount of trading in a given support or resistance area can be determined in three ways: the amount of time spent there, volume, and how recently the trading took place.
The longer the period of time that prices trade in a support or resistance area, the more significant that area becomes. For example, if prices trade sideways for three weeks in a congestion area before moving higher, that support area would be more important than if only three days of trading had occurred.
Volume is another way to measure the significance of support and resistance. If a support level is formed on heavy volume, this would indicate that a large number of units changed hands, and would mark that support level as more important than if very little trading had taken place. Point and figure charts that measure the intraday trading activity are especially useful in identifying these price levels where most of the trading took place and, consequently, where support and resistance will be most likely to function.
A third way to determine the significance of a support or resistance area is how recently the trading took place. Because we are dealing with the reaction of traders to market movement and to positions that they have already taken or failed to take, it stands to reason that the more recent the activity, the more potent it becomes."
How Support and Resistance Levels Reverse Their Roles
According to Murphy, one of the most interesting aspects of support and resistance is their reversal of roles: "So far we've defined "support" as a previous low and "resistance" as a previous high. However, this is not always the case. This leads us to one of the more interesting and lesser known aspects of support and resistance-their reversal of roles. Whenever a support or resistance level is penetrated by a significant amount, they reverse their roles and become the opposite. In other words, a resistance level becomes a support level and support becomes resistance."
Murphy emphasizes the need for caution in determining the significance of a penetration: "There is quite a bit of subjectivity involved here in determining whether a penetration is significant or not. As a benchmark, some chartists use a 3% penetration as a criteria, particularly for major support and resistance levels. Shorter term support and resistance areas would probably require a much smaller number, like 1%. In reality, each analyst must decide for himself or herself what constitutes a significant penetration. It's important to remember, however, that support and resistance areas only reverse roles when the market moves far enough away to convince the market participants that they have made a mistake. The farther away the market moves, the more convinced they become."
ETH below resistance
Currently, ETH is situated below resistance level around 3k price level. The last time ETH traded above 3k level was in 2022. Today, ETH tapped 3k resistance level for the second time in last 48 hours.
Do you think ETH will crack the 3k resistance? If so, when?
Do you think round numbers act as significant support/resistance levels?
Let us know in the comments
Today, we're diving deeper into the topic of identifying support and resistance levels—a subject we've briefly touched upon in our post about ranges.
Support and resistance
Support and resistance are pivotal concepts in technical analysis. John J. Murphy describes these concepts vividly in his book Technical Analysis of the Financial Markets: "The troughs, or reaction lows, are called support. The term is self-explanatory and indicates that support is a level or area on the chart under the market where buying interest is sufficiently strong to overcome selling pressure. As a result, a decline is halted and prices turn back up again. Usually, a support level is identified beforehand by a previous reaction low. Resistance is the opposite of support and represents a price level or area over the market where selling pressure overcomes buying pressure and a price advance is turned back."
The Psychology of Support and Resistance
Murphy further explains the psychological underpinnings of these areas: "The more trading that takes place in that support area, the more significant it becomes because more participants have a vested interest in that area. The amount of trading in a given support or resistance area can be determined in three ways: the amount of time spent there, volume, and how recently the trading took place.
The longer the period of time that prices trade in a support or resistance area, the more significant that area becomes. For example, if prices trade sideways for three weeks in a congestion area before moving higher, that support area would be more important than if only three days of trading had occurred.
Volume is another way to measure the significance of support and resistance. If a support level is formed on heavy volume, this would indicate that a large number of units changed hands, and would mark that support level as more important than if very little trading had taken place. Point and figure charts that measure the intraday trading activity are especially useful in identifying these price levels where most of the trading took place and, consequently, where support and resistance will be most likely to function.
A third way to determine the significance of a support or resistance area is how recently the trading took place. Because we are dealing with the reaction of traders to market movement and to positions that they have already taken or failed to take, it stands to reason that the more recent the activity, the more potent it becomes."
How Support and Resistance Levels Reverse Their Roles
According to Murphy, one of the most interesting aspects of support and resistance is their reversal of roles: "So far we've defined "support" as a previous low and "resistance" as a previous high. However, this is not always the case. This leads us to one of the more interesting and lesser known aspects of support and resistance-their reversal of roles. Whenever a support or resistance level is penetrated by a significant amount, they reverse their roles and become the opposite. In other words, a resistance level becomes a support level and support becomes resistance."
Murphy emphasizes the need for caution in determining the significance of a penetration: "There is quite a bit of subjectivity involved here in determining whether a penetration is significant or not. As a benchmark, some chartists use a 3% penetration as a criteria, particularly for major support and resistance levels. Shorter term support and resistance areas would probably require a much smaller number, like 1%. In reality, each analyst must decide for himself or herself what constitutes a significant penetration. It's important to remember, however, that support and resistance areas only reverse roles when the market moves far enough away to convince the market participants that they have made a mistake. The farther away the market moves, the more convinced they become."
ETH below resistance
Currently, ETH is situated below resistance level around 3k price level. The last time ETH traded above 3k level was in 2022. Today, ETH tapped 3k resistance level for the second time in last 48 hours.
Do you think ETH will crack the 3k resistance? If so, when?
Do you think round numbers act as significant support/resistance levels?
Let us know in the comments
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This post does not offer personal investment advice or recommendations. Bitstamp accepts no responsibility for any damage or loss from the utilization of the information presented here.
This post does not offer personal investment advice or recommendations. Bitstamp accepts no responsibility for any damage or loss from the utilization of the information presented here.
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