Way of the turtle

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Way of the Turtle

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price. Since the previous highs set in early August become the
anchor against which subsequent prices are measured, prices that
approach that price are considered high. Therefore, more and
more traders are willing to sell as the price approaches those highs.
Finding the Edge in Support and Resistance
Like many aspects of trading, the concept of support and resistance
is a loose construct rather than a hard-and-fast rule. Prices are not
guaranteed to bounce off former highs and lows; they just tend to.
Prices are not guaranteed to bounce off the exact price of a high
and a low; sometimes they react a bit before, sometimes a bit after,
and sometimes not at all.
If one is employing a countertrend strategy, support and resist-
ance is the direct source of the edge. The tendency for prices to
bounce off previous highs and lows is what provides the edge for
countertrend traders. When support and resistance holds up, the
countertrend traders who rely on its effect will make money.
If one is using a trend-following system, the breakdown of sup-
port and resistance is what matters. Consider what happened when
the support level did not hold in the case of the December 2006
heating oil contract (see Figure 6-2).
The support at $2.10 per gallon held the first time it was tested
in mid-June. The price bounced off $2.10 and then stopped at
$2.31, which served as a new resistance level. When the price
bounced off the support line at $2.16, it went higher but was unable
to exceed the resistance level at $2.31. Note what happened the sec-
ond time the price reached the level marked “Support 2.” This time
the price hesitated, showing that there was some buying pressure at
Falling Off the Edge
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that price but it did not hold up. The price dropped below the “Sup-
port 1” line, where it initially also moved upward for a few days,
showing that there was some buying pressure at that level as well.
It is what happened next that is the most interesting, especially if
you consider the likely psychological perspectives of the various mar-
ket participants. On September 5, the price dropped and closed
below the previous low at $2.05, which had been set on August 30,
just three trading days earlier. That meant that anyone who recently
had initiated a long position by buying heating oil in anticipation of
higher prices was holding a losing trade. Further, there were no
recent price points that one could expect would offer support, mean-
ing that there was a significant possibility that if the price fell, it might