It is widely believed that SM respects the support and resistance areas.
Before we proceed with Support and Resistances with regards to VSA let us look at some basics about support and resistances.
The general practice followed by most of us is to draw lines from previous swing Highs and Lows (or high and low pivots). Once these lines are they are taken as Support and Resistance lines .. I repeat….LINES… IMHO this is one of the basic folly we make… The question we ask here is “How can a single price act as a Support or Resistance Line ?” It is like assuming that in case of resistances there are a huge numbers of people holding the stocks at this particular price and early waiting sell.
A more reasonable assumption would be that there are many holding the price at and around last swing high. So there would be a area or a zone of supply/Demand rather than a single price. In case if the last swing high was an Upthrust bar the whole range off the bar could become a supply rich area.
The point here is that not all swing Highs and Swing Lows offer Resistance / Support. A swing high can be considered as a resistance only if the price reacts at that level. Till then a swing high remains a swing high. Same is the case for the Supports. Swing lows become swing lows only if the price reacts at these levels Enclosed is charts explaining this concept..
Please feel free to express contrary views if any… More on Support and Resistance Later
An important thing to note here is that the Resistance areas do not represent large supply waiting to be dumped. In the same way the Support areas do not represent a huge demand waiting to lap up all the supply coming in.
It is better to consider the resistance areas are zones where selling pressure increase and support areas represent zones where buying pressure increases.
Now the question is what Resistance and support has to do with VSA? As mentioned earlier the SM generally give due respect to the Resistance and Support areas as they represent zones of Selling pressure and Buying pressure.
In general increased volume with increased spread as the stock approaches a resistance area is a bullish sign. Falling volume and decreased spread would mean that stock would be stalled at these areas.
In the same way decreased volume and spread as the stock approaches support area is sign that the stock would take support in that area and reverse. Increased volume and spread would indicate that chances of the stock breaking the support are more.
If Resistance areas are crossed with high volume it is a sign of bullishness and if the crossing is with low volumes caution is advice. In the same way if supports are broken with high volume it is a sign of bearishness and low volume crossing should be viewed with caution. Going short on a low volume break of support could result in a bad trade.
The SM often attempt to push through the Resistance areas with a huge volume.
These are clearly evident on the charts in terms of high volume wide range bars.
In general it always pays attention to resistance zone even if you are using you own trading systems. When “Buy’ signals are generated near resistance zones one has to be careful.
