When a trend begins the question arises: Where will it go and how far? An effort to say something about this question will be found in Support Resistance Congestion, hereafter known as SRC. Draw a support or resistance line across the bottoms and tops of a price series. Do this several times and you may expect to have lines of different lengths representing shorter or longer time periods. Imagine a vertical line through the point of interest. This point is often the last point of the price series but whichever point it is the support and resistance lines will cross the vertical line at the particular date.
Short lines near the point of interest will likely be close to the current price action. Long lines representing support or resistance over a considerable time may pass through the vertical line far away. Either way the collection of support and resistance lines will mark off points along the vertical line to give a distribution of possible points of support and resistance located in time at the point of interest.
If the number of points along the line are widely spaced then support or resistance at any given point may not be very strong. But draw many lines and have them all pass through the same point on the vertical line suggests that support or resistance at that point may be very strong. In that case a congestion of points will appear on the line. This is the underlying motive for constructing the SRC.
Support and resistance levels are often drawn as horizontal lines through the relevant support or resistance point. If we project the distribution points from the vertical line at the point of interest back along the price series from the point of interest to cover the time frame in which the relevant support or resistance line was drawn we will get support (IS) and resistance lines (IR) as shown in the graph above to the left.
In the above graph of the SRC we have a point of interest at O. The support line is labelled IS and the resistance line is labelled IR. Each point on either line represents the value at which the support or resistance crosses the vertical line at the point of interest. This is presented along the price axis and represents a price as expected. Along the time axis the time frame of the support or resistance line is graphed backwards from the point of interest.
Let us consider the the support line. We see in the graph the points A, B, C, D, and E. These points mark places along the vertical line where congestion is tending to occur. These are points at which resistance to a decline from the price at O is likely to be fairly strong.
Moreover, the support is likely to be stronger as the eye moves from left to right. On the right the time frames are small and the drawn lines are short. On the left the time frames are large and the support line is necessarily of longer duration representing more price action and is expected to be more authoritative.
The SRC is then an automated way to look for potentially important regions of support in a decline from the point of interest at O. Similarly it looks for regions of resistance to a rise from the point O.
There remains the line labelled Mark. Mark is a line whose value is the price of the point of interest and is used to identify proximity to potential congestion regions. In the graph above Mark is slightly above the point A (visually) and so the price is near a potential resistance level. But only in potential.
Support and resistance lines are only suggestive–never determinant. In strong price action price may go through them as though they are not there. But often price finds resistance to further movement at such points and the study of these lines is at the core of technical analysis.
The SRC is a graphical, at a glance, indicator of regions of potential reversal. At such times when Mark enters a region of congestion it is wise to pay close attention to Trip I.