Market geometry is the purest form of technical analysis. It uses previous levels to suggest future support and resistance levels. The idea behind support and resistance is that if the price hesitated in the past at a specific level, it is likely that it will hesitate again on the first attempt to break that level. The interchanging nature of support and resistance plays a critical role here. Once broken, support becomes resistance, and vice versa; resistance turns into support after the price breaks higher. During trends, the price stops moving for a while and consolidates. After the trend resumes, that area of consolidation is projected on the right side of the chart to find future support and resistance levels. When more than one element enters the same area, it is said that the market forms an area of confluence. The more factors pointing to the same outcome, the more powerful the trade is considered to be.
Horizontal support and resistance
One way to look at support and resistance is to use horizontal levels. In both bullish and bearish trends, the market finds it difficult to pierce certain levels. The USD/JPY daily chart below shows the bears pushing lower during a rising trend. However, every time they enter the support area, the price bounced higher.
Eventually, the support gives out and, as explained earlier, turns into the new resistance area projected onto the right side of the chart. Often, the first time the price approaches this level again it will not be able to break it, as shown above.
Horizontal and dynamic levels in an area of confluence
It would be even more difficult for the price to break the level if certain other factors also reinforced the resistance. If you draw a trendline connecting the previous high with the next lower high, its projection offers a dynamic resistance for future prices. When a dynamic resistance level intersects a horizontal area, it is said that the market has formed an area of confluence. The blue sphere below shows an area of confluence between horizontal and dynamic resistance.
One rule of thumb is that the more often the price approaches support and resistance areas, the less likely these areas will hold. We can see above that after the area of confluence rejects the bullish move, there are a few attempts to approach resistance, meaning it may not hold for long. So, where will the price most likely hesitate next? You guessed it; at the horizontal resistance level projected from past prices.
Between classic and dynamic support and resistance, the latter holds up more against price action. Dynamic support and resistance levels follow the price and contain the price action more often than classic levels. The USD/JPY daily chart above is a perfect example of this.
- Classic support and resistance levels form on the horizontal axis.
- A confluence area is defined as where dynamic support or resistance meets classic support or resistance.
- The more often the price approaches support and resistance, the less likely the level will hold.
- Confluence areas are difficult to break on the first attempt.