People having an asset want to sell it for the highest profit possible. People without it want to buy it as cheaply as possible. It’s called greed and – believe me – nobody’s in this business for the charity. Now, put all of these people into a room and you’ll get something like this: sellers will start high, then start lowering their price until someone buys. Once this happens, another seller will lower his price more to get more of the buyers. And so the price begins to drop.

At some point, the price is so low, sellers stop selling because they don’t want to sell at a loss. Buyers start buying rapidly but sellers realize they can start raising their prices – again – until the price is too high and nobody’s buying.

And so, the pattern emerges of an asset’s price bouncing between too high and too low, or – as we like to call it in the trading world – resistance and support. This pattern shows a ranging trend. It’s ranging between support & resistance.
But, you’ll find that this pattern repeats itself in the long term and in the long term, only at different prices.

If we look at oil, for example, you’ll see that since World War 2 it’s been ranging between $20 and $120. At $20, it’s simply not worth extracting; and $120, nobody can afford it.
Before the Saudis killed the market in 2014, it was ranging between 100 and 130, and since then it’s been ranging between 45 and 75, more or less.

In short, $20 is the level at which buyers know oil has reached its lowest and they begin to buy, pushing up prices as demand rises and supply diminishes. 120 is the point at which sellers know they’ve gone too far, since nobody’s buying.

At support, we say the asset is oversold and at resistance, it’s overbought.

Now, clearly somewhere in between hides that elusive rate we call “fair value. With shares and most commodities, that’s easy to determine. It’s the price of extraction and processing, for oil, plus what’s enough to feed the families. With shares, it’s a company’s assets and sales divided by the number of shares out there in the market. With currencies it’s a measure of economic health and buying power. For pure DOWist technicians, fair value is an natural outcome of efficient markets. It reflects all known information about an asset, but that’s kind of idealistic and has no place in the marketplace.

Meanwhile, we’re left to trade the range – buying at support, selling at resistance. Until something fundamental comes along to break that comfortable existence. That’s when we get what’s known as a breakout. When that happens, we can expect one of two things: either the gravity of the range will pull prices back in or a new range will be defined.

Quite often, we find that psychology takes over, and the old resistance – we’re talking about a breakout to the upside, for now. Resistance now becomes support since nobody’s prepared to sell below that now low, as the asset starts looking for a new resistance level. We can see very roughly that that’s what happened back in 2015 with oil. It still hasn’t crossed above what USED to be support. Nobody’s prepared to return to the bad old days … except the oil producers.