Trends, Support, and Resistance
How to define a trend objectively, and why support and resistance are about crowd memory, not fixed lines.
Murphy defines an uptrend concretely as a series of successively higher highs and higher lows, and a downtrend as the mirror image — successively lower highs and lower lows — deliberately giving traders an objective test rather than a purely visual impression. A trendline is then drawn by connecting at least two of the relevant swing points (lows in an uptrend, highs in a downtrend), and the book stresses that a line touched only twice is tentative — it takes a third touch that holds to meaningfully validate a trendline as a level other market participants are actually respecting, not just a line one trader happened to draw.
Support and resistance are introduced as the same underlying phenomenon viewed from opposite directions: support is a price level where past buying was strong enough to halt or reverse a decline, resistance is a level where past selling halted or reversed an advance. Murphy's explanation for why these levels keep working is behavioral rather than mechanical — traders who bought near a prior low and regret not buying more tend to buy again if price returns there; traders who sold too early near a prior high tend to sell again if given a second chance at that price. This is also why a broken support level tends to become new resistance, and vice versa: the population of traders with regret at that price simply flips from "wish I'd bought more" to "wish I'd sold there."
Murphy connects this back directly to the prior chapter's confirmation principle: a trendline drawn from just two points is analogous to an unconfirmed Dow Theory signal — suggestive, but not yet trustworthy — while a third touch that holds functions as the confirming evidence that turns a tentative line into one worth acting on. The same demand for independent agreement before trusting a signal that ran through Dow Theory reappears here in a more visual, geometric form.
| Situation | What it suggests |
|---|---|
| Price respects a trendline on a third touch | The line reflects a level other participants are genuinely defending |
| A brief, low-volume poke through a trendline | More likely noise than a genuine trend change |
| A decisive, higher-volume close through a trendline | A more credible signal the trend has actually shifted |
| Old support broken decisively | That level is a candidate to act as new resistance on a retest |
A common misreading Murphy warns against is treating support and resistance as precise, single price points. Because the levels reflect the collective memory and regret of many different traders who each entered at slightly different prices near the same area, real support and resistance behave more like zones than exact lines — expecting a bounce at exactly one specific price, rather than somewhere in the surrounding zone, sets up unrealistic expectations and premature conclusions that a level has "failed" when price merely tested the edge of the zone rather than its precise center.
The practical implication is that a trader reading support or resistance too literally — treating a single price like $50.00 as the exact boundary rather than a rough neighborhood — will repeatedly misjudge whether a level has actually given way. A decline that stops at $49.60 and a decline that stops at $50.20 are both, in Murphy's framing, respecting the same zone; only a decisive close well through the zone, ideally with the higher volume the earlier trendline discussion calls for, should be read as a genuine break rather than normal noise around the zone's edges.
Imagine two traders watching the same stock approach a support zone around $48-50. One treats $50.00 as the exact line and concludes support "failed" the moment price ticks to $49.80. The other recognizes the zone extends down to $48 and waits for a decisive close below that — and avoids being shaken out by what turns out to be a routine test of the zone's edge rather than an actual breakdown.
The role-reversal principle is one of the more testable psychological claims in the book, and it is worth walking through carefully because it reappears, in different clothing, in the chart-pattern chapters later in this course. Consider a group of traders who bought a stock at $50 support and watched it later break down to $40. Many of them are now underwater and anchored to their $50 entry price — when the stock eventually rallies back toward $50, a meaningful number of them sell simply to "get out even," creating fresh selling pressure at exactly the level that used to attract buyers.
This is also why the strength of the role-reversal effect tends to scale with how much trading activity originally happened at that level, and for how long — a level that was tested and defended repeatedly over months carries a larger population of traders with regret anchored to it than a level touched only once, briefly. Murphy treats this as one more reason volume and time spent at a level matter alongside the price level itself, a thread this course returns to directly in the volume chapter.
- An uptrend is objectively a series of higher highs and higher lows; a downtrend is the mirror image — this gives trend identification a concrete test, not just a visual impression.
- A trendline needs a third touch that holds to be considered validated, not just the two points used to draw it — the same confirmation logic Dow Theory applied to two averages.
- Support and resistance flip roles once decisively broken, because the traders holding regret at that price flip from one side to the other.
- Support and resistance are better understood as zones than exact price lines — treating them as a single precise number leads to premature conclusions that a level has failed.
- The strength of a role-reversal effect tends to scale with how much trading activity and time originally built up at that level.