There's an adage which claims old resistance becomes new support. That's only partially true. For the price to likely (but not always) find support at an old resistance level, the resistance level should have been tested at least twice (preferably three or more times) and the breakout above that resistance should be aggressive and fairly extensive. "Fairly extensive" is subjective, but means the price should move far enough above the old resistance zone to rule out a false breakout. When the price tests a resistance zone two (preferably more) times, and then has a strong break above that area, when the price pulls back to that area it is more likely to act as support. Such is the case with these four stocks.

Throughout March, April and early May, American Airlines (NYSE:AAL) met a resistance zone between $38 and $40; it tested the area about six times before eventually breaking above it in June. Since the resistance area was about $2 in height, the breakout above the resistance should also be at least $2 to rule out the possibility the price rise was just a false breakout. On June 9, the price reached $44.43, $4.43 above the former resistance area, indicating the breakout is legitimate. A pullback to, or into, the former resistance area ($40 to $38) presents a buying opportunity. Target is $45.50 with a stop below $37.50.

Throughout March, April and early May, American Airlines (NYSE:AAL)

Capital One Financial (NYSE:COF) tested a resistance area between $78.49 and $77.91 three times since the start of 2014. A breakout in June saw the price rally to $82.32, successfully clearing the resistance and indicating the the move higher isn't a false breakout. How far the price will pull back is unknown, but the buy-zone is between $79.50 and $78, with a stop below $77.50. The upside target is $85 to $86.50.

Capital One Financial (NYSE:COF) tested a resistance area between $78.49 and $77.91 three times since the start of 2014.

Atmel (Nasdaq:ATML) peaked three times in early 2014 between $8.91 and $8.76 before breaking higher in June. The breakout was aggressive and substantial enough to indicate it wasn't a false breakout. Buying on a pullback to the former resistance area, or slightly above it, is one option. Given the price has had a near vertical run since the may low at $7.47, a deeper pullback is possible. While it may not occur, waiting for a pullback to the $8.50 to $8.25 provides a better risk reward. Place a stop loss below $8. The target is between $9.25 and $9.50 since the stock has a tendency to breakout then range again; getting out near the top of what is likely to be another range ($9.50 area) is the prudent play.

Atmel (Nasdaq:ATML) peaked three times in early 2014 between $8.91 and $8.76 before breaking higher in June.

Anadarko Petroleum (NYSE:APC) is moving aggressively higher after testing the $103.92 to $104.84 resistance zone three times in April and May. In June, the stock broke aggressively higher, and it could be some time before a sizable pullback occurs. Based on the old resistance zone, a pullback between $105 to $104 presents a buying opportunity. Stop loss is placed below $102, or $100 to provide a bit more room on longer-term trades. Following the pullback the target is above $110.

Anadarko Petroleum (NYSE:APC) is moving aggressively higher after testing the $103.92 to $104.84 resistance zone three times in April and May.

The Bottom Line

For old resistance to become new support, the resistance area should be tested multiple times before a breakout occurs. The breakout should be large enough to rule out a false breakout. When the price pulls back to, or into, the former resistance area, it presents a buying opportunity. This pullback is caused by traders selling their position to lock in a small profit from the prior breakout. Once that selling ceases, the uptrend is likely to continue. The same process can be applied to different time frames to suite your trading style and time frame. Nothing works all the time, but by making sure the resistance area and breakout correspond to the aforementioned guidelines, old resistance is more likely to become new support.

Related Articles
  1. Chart Advisor

    ChartAdvisor for June 13 2014

    Weekly technical summary of the major U.S. indexes.
  2. Chart Advisor

    ChartAdvisor for June 6 2014

    Weekly technical summary of the major U.S. indexes.
  3. Chart Advisor

    ChartAdvisor for May 30 2014

    Weekly Technical Summary of the Major U.S. Indexes.
  4. Chart Advisor

    ChartAdvisor for May 15 2014

    Weekly technical summary of the major U.S. Indices
  5. Chart Advisor

    ChartAdvisor for May 9 2014

    Weekly technical summary of the major U.S. indexes.
  6. Chart Advisor

    ChartAdvisor for May 2 2014

    Weekly technical summary of the major U.S. indexes.
  7. Chart Advisor

    ChartAdvisor for April 25 2014

    Weekly technical summary of the major U.S. indices.
  8. Chart Advisor

    ChartAdvisor for April 18 2014

    Weekly technical summary of the major U.S. indices.
  9. Chart Advisor

    ChartAdvisor for April 11 2014

    Weekly technical summary of the major U.S. indices.
  10. Chart Advisor

    ChartAdvisor for April 4 2014

    A technical summary of the major U.S. indices.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  3. Indicator

    Indicators are statistics used to measure current conditions ...
  4. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  5. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  6. Sucker Yield

    When an investor has essentially risked all of his capital for ...
RELATED FAQS
  1. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!