become self-fulfilling prophecies. If enough traders believe in the significance of support and resistance, and demonstrate their belief by making trades at those levels, they are in effect fulfilling their own beliefs about the future.

As observers, if we know that each side (in the perpetual tug of war between buyers and sellers) expects one thing to happen, then we will know who will be the winner, who will be the loser, what they will likely do in each case, and how it will affect the balance between the two forces.

For example, if buyers are bidding up a market, causing prices to rise, and all of a sudden many traders are willing to sell for less than the last price (or one trader comes into the market with a big order to sell), causing an immediate price reversal, the price level at which the market stopped is resistance.

Now, it really doesnt matter why the balance of forces shifted from buyers to sellers. Everybody will have his own reasons for what caused prices to reverse. All of them will usually be way beyond the simplest and most obvious reason-that enough traders were displaying a strong enough conviction in their belief in future value to stop the upward price momentum and create downward price momentum.

What is really important about this, however, is that many traders will remember the market reversed at that price level. As a result, that price will then have a degree of significance in the minds of those traders who experienced the reversal.

This first reversal is a top. What we dont know is whether it will remain a top, how long it will take before it is challenged again, or whether it will ever be challenged again.

If the buyers are dominant enough to bid the market back up to the previous high, they will consider this second attempt a test and begin to anticipate whether or not prices can exceed the previous high. The only way that can happen is if these higher prices actually attract additional traders into the market on the buy side because they believe it is an opportunity to buy low relative to the future. Floor traders are especially aware of whether or not new traders are being attracted into the market from off the floor and act on this information.

For the sake of this example, if the market reversed very strongly the last time prices approached this level, there will be many traders

who will think it will probably reverse again. As a result, they may act on their belief about the low probability of prices trading beyond the last high and thereby prevent it from happening. If more traders are willing to act on the belief that it wont in relation to those who act on the belief that it will, then prices will stop again.

Technically, once the market tests a previous high or low and fails to penetrate, you then have a defined support and resistance area. Support and resistance are most easily identified in point-and-figure charts because they graphically represent price movement in reversals. Once support and resistance are established and identified, it can be very easy to trade by putting your orders on either side of the support or resistance line.

For example, if over the last two weeks, every time the bonds rallied to 95-25, then fell back significantly to some support level, like 94-10, what I have just described is a support and resistance rone, commonly referred to as a trading range. The significance of either end of the zone would be determined by how many times prices rallied to 95-25 and failed to penetrate, and how many times prices fell to 94-10 and failed to penetrate. Obviously, the more attempts and failures, the more weight these points will have in the minds of the traders who experience these tests and subsequent failures.

For an objective observer with no bias toward any particular direction, trading ranges can be very easy ways to make money. As the market approaches 95-25, put in an order to sell somewhere around 95-21. Since we know the markets are not precise, you dont want to put your order exactly at the upper end of the range, because each time the market makes an attempt to penetrate there will be many traders who will be anticipating a failure. As a result, they will start selling early and the price may never get to 95-25 for you to get filled, if you had placed your order there.

Also, put an order in the market to stop and reverse (buy two) possibly around 95-31. Each circumstance will be different. In this example, the 6 ticks that I have given the market to define itself may not be enough. The object would be to put your orders in a place where the highest probability is that it will continue in the direction of your trade. If the market trades to 95-31, it still may not be enough for old sellers to become disappointed and bail out of their positions en masse, causing prices to rise even further.

This trade will work if the resistance level has a high degree of significance in the minds of enough traders for them to act and sell against it in relation to those who are willing buy. Each time the market approaches this area, traders will expect either one of two possible things to happen. The market will penetrate, or it will fail again. In any case the price move that results will be significant because one side of the market will be disappointed. And if we know what will validate and disappoint each group, then we can determine how they will likely behave and thereby affect the balance of the market.

Since the market can display billions of combinations of behaviors from one point to the next, significant reference points like support and resistance narrow those behaviors down to two likely possibilities. By putting your order on both sides, you can take advantage of the situation, regardless of what happens.

Support Becomes Resistance and Resistance Becomes Support

Many traders have read or heard that old support becomes resistance and old resistance becomes support- This bit of market insight is valid for some very sound psychological reasons.

If resistance has been established at 95-25, it is because there were enough traders who sold at that price to make it resistance. In fact, it would probably be the same group of traders who sold at 95-25 each time the market approached that price- So, every time the market rallied up to 95-25 and sold off, it made winners out of all those traders who chose to sell at or near that price. As a result, 95-25 will take on a great deal of significance in the minds of the traders who were successful. Each subsequent time they are successful will only strengthen their belief and faith in that price level.

Now, the prices rally up to 95-25 again, maybe for the fourth or fifth time, and like the last time, you will have a group of traders who believe in that resistance level and will sell against it. Only this time the buyers are very strong on the way up and continue to buy right on through the resistance level.

All the traders who choose to sell at 95-25 are now faced with having to deal with a losing trade. Some will get out with a small loss, others will hang on hoping the market will come back. In any case,

the market invalidated their beliefs about the future, and they are suffering considerably. They had faith in 95-25, and in their minds the market betrayed them.

If the market happens to come back to 95-25 after rallying for several days, how do you think the group of traders who sold at 95-25 the last time-the ones who believe they were betrayed-are going to behave? First, the traders who were hanging on in hopes of the market coming back will bail out as soon as they are close to being made whole. They are so grateful for getting their money back, there is no way they will stay in that trade regardless of what the possibilities are for additional profits. They will have to be buyers to liquidate their shorts and will be all too happy to end their suffering.

The traders who originally cut their losses when the market blew through 95-25 wont consider selling at that price again because of the emotional pain of being wrong the last time they sold at that price. I am not saying they will in turn be buyers at that level, but they are very likely not to sell. The overall effect this will have on the balance of the market is to take away from the existing pool of available sellers at 95-25 (old resistance), thereby causing the balance to be tipped in favor of the buyers. Hence, old resistance becomes support, and old support becomes resistance for the same reasons.

Trends and Trendlines

Trends, a series of higher highs and higher lows, or lower highs and lower lows over a period of time, work because there arent enough sellers to absorb the number of buyers competing with each other to get into the market during that period of time. Adding to this buying force will be old sellers at lower levels who finally lose faith and bail out of their positions. They will do this in significant numbers when the prices penetrate what they believe to be significant reference points.

Keep in mind that trends are a function of time. The next tick up could be defined as a one-tick trend. How long will the imbalance between buyers and sellers last?

In an upward-trending market, prices will retrace because buyers are taking profits. This will create some counteracting pressure, but if the trend continues after a normal retracement, it just tells you there still arent enough sellers around to absorb all the buyers, with

enough left over to create downward momentum. You will know when that has happened when the trending market breaks its normal ebb and flow pattern. That is why markets that break trendlines have a tendency to keep on going in the direction of the break, because it signals a significant shift in the balance of forces.

After a certain period of time, you can notice how trending markets will develop a certain rhythm and flow, making the price movement look very symmetrical on a bar chart. You really dont have to know why this is so, you just have to notice that it exists. When this flow is broken (the market trading above or below a significant trend line), it is a good indication the balance of the market forces has shifted. Then ask yourself, what is the likelihood the shift will gain hold and continue trending in the direction of the break?

You dont even have to know the answer to that question. Put in an order at a spot that would confirm the highest probability of a change in the balance. Then wait for the market to define itself. If your order is filled, put a stop where the market shouldnt be to confirm that your trade is still valid. "What is a valid trade?" you ask. One where the highest probabilities for price movement are in the direction of the prevailing force.

High-* Retrace-* Rally to a Lower High

I will give you an example. No matter how simple a trade this is, it has very sound psychological reasons for working. In this example, the market made new highs and sold off. The sell-off could be the result of new sellers coming into the market in force, or old buyers selling to take their profits, or a combination of both. Prices will continue to drop until enough traders believe the price is cheap and are willing to take the initiative and bid the price back up. As the price approaches the last previous high, buyers will begin to anticipate whether or not prices can penetrate, and sellers will be looking for another top.

In either case expectations by both will be raised. If some buyers are willing to bid the price past the previous highs to some significant level, it will make believers out of others who were on the sidelines. If they do come in, it will add to the momentum.

Some old sellers will admit to being wrong and will have to buy to get out of their trades, thus adding to the upward momentum.

However, what if the market approaches the highs the second time, and sellers come back into the market again with enough force to keep the price from exceeding or equaling the previous high? Buyers will start to become disappointed. Where will they really be disappointed?-if enough buyers dont come into the market to support the price at the previous low. If prices penetrate that low, watch for buyers to bail out en masse. For them to get out of their position, who is going to buy it from them? If everybody is trying to sell and no one is available to buy, what are prices going to do? Fall like a rock.

The reason why a bull market is ready to turn into a bear market when the general public gets involved is because the general public has the least tolerance for risk and consequently needs the most reassurance and confirmation that what they are doing is a sure thing. As a result, they will be the last to be convinced that the rising market represents an opportunity. If a bull market has lasted for any length of time, the general public will feel compelled to jump on the bandwagon so to speak, because of their perception that everyone else is doing it and making money. They will pick up on any reason that sounds the most rational to justify their participation, when in reality, they will know very little about what they are doing, but since everyone else is doing it, how can they go wrong.

A continuing bull market requires the continual infusion of new traders who are willing to pay higher and higher prices. The longer a bull market lasts, the greater the number of people who are already participating as buyers, leaving fewer and fewer traders who havent already bought and fewer and fewer traders who are willing to bid the price up. These older buyers obviously want to see the market keep on going up, but they also dont want to get caught holding the bag, if the market stops going up. As their profits accumulate from the higher prices, they start to get nervous about taking their profits.

By the time the general public starts buying en masse, the professional traders knows the end is near. How does the professional know this? Because the professional knows that there is a practical limit to the number of people who will participate to bid the price up. There will come a point where everyone who is likely to be a buyer will have already bought, quite literally leaving no one else to buy. The professional trader would like the market to continue to go up indefinitely just like all the other buyers. However, he also understands the impracticably of that happening, so he starts taking