Profiting with Chart Patterns book

Support & Resistance
The first pattern is Support and Resistance. I group these together because they 
operate the same way in the chart. But, they are very different psychologically. 
Whenever you touch a support level for the third time, that usually indicates that you 
are going to bounce off and move to the upside. If you break through a support level 
that was formed with two prior points, that is usually a very powerful indication of a 
sell off. Support breaks can create panic and should therefore be shorted. 
Figure 3-2.
Support and Resistance Pattern
Resistance is equally powerful on the short side. If you approach a resistance line and 
reverse, the market will typically sell off at the reversal, and you will have a nice big 
drop that can be shorted. Conversely, if you break through a resistance level, as we 
saw in our first example, then the chart is most likely going to make a strong move in 
the positive direction. Again, the reason this happens is because the market is 
watching that line. As price goes through the line, people pile on their buy orders 
because they think the stock is going higher. It is a self-fulfilling prophecy. All of 
these patterns work the same way. They are all based on the psychology of the market 
seeing the pattern and reacting to it, thereby accelerating the pattern formation.

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Chapter 
3 Definitions, 
Structures, 
& 
Examples
Profiting with Chart Patterns
3-4
nirvanasystems.com
Support & Resistance Structures
Here is our expanded structure diagram for Support and Resistance. The reason we 
have two Eighths tools is that you can have a bounce or a break. The more powerful 
of the two is going to be a break. Support breaks do create panic, and you really want 
to watch for those. But, equally tradeable is a support bounce. Again, you are looking 
for the third bounce. Typically you will see where the chart bounced off a price level 
and now it is coming down for the third time. It is that third bounce that is typically 
the most tradeable. But, you can trade the second bounce as well.
Figure 3-3.
Support & Resistance Structure Diagram
Looking at our structure, you can see that the target is drawn at the 50% level on both 
the upside and the downside, which gives us our 3:1 Reward:Risk from the ideal entry 
point.