When working to locate potential levels or zones of support and resistance, it's important to focus on what Magee calls the "territory" -- the reality -- rather than the map, i.e., our representation of that territory. The territory is prices paid. Our maps are our representations of it: MAs, Fib ratios, MACD, patterns, price and volume bars, etc.
S/R are found where important buying/selling have taken place, important enough to have turned price. Therefore, the first place to look for S/R are those price points and/or price levels. Anything else -- e.g., a trendline -- is a representation, and that representation may have nothing to do with the reality, i.e., price.
"Importance" is defined as those levels or zones in which a relatively large number of trades have taken place. These trades need not have occurred on only one occasion. In a base, for example, when "big money" is accumulating shares, these trades take place over an extended period of time over a narrow range of prices. Therefore, all told, many trades have taken place even though "volume" -- i.e., trading activity -- has been low.
Many trades can also occur in a broader range over a period of time which may be shorter or longer than an accumulative base. For example, if a given level is hit repeatedly and price is "supported" there by professional buying, that level becomes strong support, even though the number of shares traded during any one occurrence are not impressive.
Ditto all of this for resistance. There will be a level at which shares or contracts or whatever are repeatedly sold, though the reasons for the sales may be difficult if not impossible to determine. These sales can take place in a "zone of distribution". Or they can take place over time when a particular level is repeatedly tested.
Support and resistance, then, can be found in a swing point or the top or bottom of a reaction, but it is highly unlikely that the support or resistance found there will be important as it doesn't represent enough previous trades. In other words, there just aren't enough traders who care about it to make it important.
For the same reason, whatever support and resistance seem to be found with indicators or trendlines are most likely coincidental since these other lines don't represent previous trading activity. In fact, they're constantly moving.
The term "law of reciprocity" or "principle of reciprocity" is sometimes applied to the tendency of support to become resistance when it's penetrated, or vice-versa. However, "law" and "principle" are a bit high-toned to apply to this concept. There is nothing absolute about S/R. In fact, S/R can be quite soft. For example, if a given level is tested repeatedly as support, those holders who bought there may eventually begin to become concerned over these tests and over the fact that whatever they bought isn't going anywhere. Some of them may decide to sell some of all of whatever they bought if and when another test occurs. In this way, support fails.
Even "failure", however, may not be as important as first thought. S/R isn't, and need not be, rigid. In fact, it is quite flexible. A level or line can be penetrated to what seems to be an intolerable degree, but if price rebounds to that level or line and finds S/R there yet again, then that level or line can become even "stronger" (more important) than it was before, which is why it's better to think in terms of S/R "zones" than of specific prices.
S/R may be too soft for some traders to fool with. However, if one understands that correctly-drawn S/R lines represent levels or zones in which a large number of trades took place, and that one can expect important action to take place at important S/R, he can then avoid wasting his time on relatively trivial trades and prepare himself to take advantage of more potentially profitable opportunities.
