“The support level is an area below the current price, which has prevented it from falling further in the past. That is why we would usually expect prices to bounce up from it again, when this support level is reached in the future.” This is the short definition of a support level and how traders use it to forecast future market behavior. It is a useful knowledge, because these levels work as they should more often than not. However, just like no trend lasts forever, no support level holds forever. But how to predict if a support level is going to give up? In order to do so, we need a method, which is more advanced than conventional technical analysis. The Elliott Wave Principle is the first one that comes to mind. In fact, we already used it to recognize an unreliable support on the weekly chart of BHP Billiton given below.
This is the chart we applied to our forecast, called “BHP Billiton And The Unreliable Support”, which we published on September 24th, 2014. The support zone between 17.00 and 16.50 is clearly visible. Someone unfamiliar with the Wave Principle would have probably expected another rise. We, on the other hand, were preparing for the exact opposite. Today, more than three and a half months later, we have a reason to thank Ralph Nelson Elliott one more time.
As visible, the support zone has been decisively broken, which led to BHP Billiton declining even more. In the middle of December 2014 prices fell to as low as 12.50. So, how to recognize an unreliable support? By recognizing the wave structure of the price action prior to it. In this case, there was a five-wave impulse to the downside from 26.50 to 16.60, followed by a three-wave advance to 22.40. Together, these two patterns formed a perfect 5-3 Elliott Wave cycle suggesting, that the trend should resume in the direction of the impulsive sequence. In addition, the minimum targets were below the bottom of wave (1/A). That is why we thought the support is not strong enough to hold the bears. Less than four months later, the market confirmed our expectations. Same rules apply, when trying to spot an unreliable resistance.