Last week we introduced the concept of support, talked about the three types of support, and discussed two of them. This week we will look at the third. Just to review, we discussed ‘self fulfilling prophecy’ support, which is often the partial result of moving averages but also overlaps all support and all technical analysis to some degree. We then went in to detail on the concept of ‘minor support’ and showed charts to illustrate how it works. Despite its name, minor support usually offers the strongest form of support.

Today we will discuss major support sometimes known as ‘memory affect’. This means simply that there were a lot of buyers here before, so there will be again. Sometimes it forms because a real buyer (or seller, all support concepts can be reversed to discuss resistance) camps out in a certain area. They need to buy, but their buyer will not allow them to go over a certain price. So every time the stock dips to that price, they buy. Look at the hourly chart of ACTIVISION INC (ATVI), below

Here is a consolidation that lasted for ten days and hit the same level of support six times and the same level of resistance five times. These areas have become major support and major resistance areas. When do they become ‘major’? The answer is, on the ‘third’ time. The first time is a random event. The second time, we do not know that price will stop here. Think about a downtrend. We always encounter a prior support area, but we go right through it. That is because we are in a downtrend. It is not until it holds a ‘second’ time that we are now sideways, and we expect the third time to hold as major support. Bases, as you know them, rely on major support and major resistance at the top and bottom. Multiple visits to the same area: Why does this happen? It could be that a larger buyer (and or seller) needs to buy (sell) a lot of shares, but is limited as to the price at which they can buy or sell at. If the buyer for example, does not want to spend more than 27.10, every time the stock comes down here, it gets bought. Since he is only buying in this area, there is a lot of demand. After this happens a couple of times, other traders pick up on this effect, and begin to tag along for the ride. This is the self fulfilling prophecy part that may last long after the real buyer is gone.

There is an exception to the ‘multiple points of support’ needed to create ‘major support’. There are times when only ‘one’ prior low (or high) can serve as major support (or resistance).

That single prior area must be a ‘special area’. This area can be created in one of several ways. First of all, if the prior low was a successful climactic decline buy, the retest of that area can be treated like a test of major support. Second, if the prior low was set as part of a novice gap from the daily chart, it can also be used as major support. Third, any prior low from which a significant rally ensued can also be major support. In the chart above, as we fall to ‘4’ we may have a situation where there was only one prior low, at ‘1’. This would not normally be considered major support. However, it is in this case because it falls in the last exception. The rally that ensued from ‘1’ to ‘3’ was huge, contained a bullish wide range bar (+ WRB), and traded above a significant resistance area at ‘2’. That allows us to treat ‘1’ as a special area, and the revisit will likely get the ‘memory bounce’ as traders realize that the stock really got bought there before.

As with everything in technical analysis, it does not really matter what ‘names’ you give to things. That is just a teaching mechanism. What is important is that you know the likely affect of various chart patterns.