Role reversal: support becomes resistance

You can recognize role reversal, where a broken resistance zone later acts as support or the reverse, and explain why it can happen.

Ceiling becomes floor

A price area stops every rally for weeks. Then, one day, the price breaks through and keeps going. A few days later, it pulls back, and stops exactly where the old ceiling used to be.

The level has changed its job. What used to block rallies now seems to catch declines. Traders call this role reversal, and it is one of the most common patterns around support and resistance.

The retest

Role reversal means that a price area changes its role after the price has moved through it:

Broken resistance can act as support when the price returns to it from above.
Broken support can act as resistance when the price returns to it from below.

The return to a just-broken level is called a retest. How the price behaves there is what traders watch. If it holds and turns, the role reversal has played out. If it closes back on the other side, the breakout has likely failed.

In the fictional chart, rallies stopped three times near 43: at 42.97, 43.01 and 43.18. On candles 18 and 19, the price broke out to 44.75. On the next pullback, candles 23 and 24 dipped to 43.06 and 42.99, inside the old resistance zone. Then the price turned up.

Why can this happen? There are several plausible reasons, and none of them is a law:

Missed buyers. Traders who wanted to buy the breakout but missed it may place orders at the old level.
Regret. Those who sold near the old resistance and watched the price rise may buy back if it returns there.
Orders. Research on currency markets by Carol Osler found that orders cluster at well-known levels, which can make the same area matter from both sides.

A retest is a test, not a guarantee. Many retests fail, and the price falls back into the old range.

Held, then higher

Follow the fictional chart.

Resistance: three rallies turn between 42.97 and 43.18.
Breakout: candle 19 closes at 44.60, clearly above the zone.
Retest: candle 24 dips to 42.99, inside the zone, and closes at 43.68.
Result: six candles later, the price reaches 46.40.

A trader who bought on the retest had a clear place for a stop: below the zone, for example under 42.80. If the price had closed back below the zone, the idea that it had flipped to support would have been proven wrong, and the small loss would have been planned in advance.

Common mistakes

Expecting every level to flip. Role reversal is a tendency.
Buying the retest without a stop. If it fails, the old range is the next stop.
Drawing the zone too tight. Retests often probe a little deeper.
Ignoring how the breakout happened. A strong breakout on volume makes a retest more interesting than a weak drift.

The takeaway

After a breakout, old resistance often acts as support, and old support as resistance. It's a tendency, not a law.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the candle where the old resistance zone held as support.

Tap the chart.

Candle 24 dipped to 42.99, inside the zone that had capped rallies before, and closed higher at 43.68.
2What does role reversal describe?

The same price area changes its role after the price has moved through it.
3What is a retest?

After breaking a zone, the price often comes back to it. How it behaves there is what traders watch.
4Why can old resistance act as support?

Orders and regret both cluster at well-known levels. It is a tendency, not a guarantee, and retests can fail.

of 4 correct.

Sources

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