V.1:5 (110-111): The Nature of Price Resistance by JESSE H. THOMPSON/Technical Analysis staff writer

The Nature of Price Resistance by JESSE H. THOMPSON/Technical Analysis staff writer

Most of us involved with speculative markets often are so preoccupied with "effect", or price activity, that we ignore "cause." But an understanding of cause can clarify our analysis of that all-important effect.

Basic cause might be defined as the ever-changing relationship between the forces of supply and demand. We traders tend to think of commodity contracts only as speculative vehicles or abstractions. We tend to forget that the commodity contracts we so actively trade normally are a reflection of the actual physical goods in which merchants are trading. As such, contract prices are closely tied to supply and demand.

Effect, or price activity, might be divided into two basic market classifications. These are a trending (bull or bear) market and a non-trending (consolidating) market. A trending market is one in which the forces of supply and demand are moving from a state of balance thru a state of imbalance. A consolidating market is moving from a state of imbalance thru a state of balance or equilibrium.

To the interactions of the two forces of supply and demand, we might add a third force, one which is constantly interacting with the other two. We will call this third force "resistance" (normally called "support and resistance"). Resistance acts as a neutralizing force to the combined effect of supply and demand. A market that is trending upward or downward will usually react or consolidate near or at major resistance. A major consolidation in the form of a top or bottom is usually formed at an important resistance level. Price tends to vibrate or oscillate near resistance or sometimes will stop rather abrubtly at resistance and change trend.