I’m having trouble understanding this sentence from the Elementary resistance and support article:
When a support or resistance level breaks, the strength of the follow-through move depends on how strongly the broken support or resistance had been holding.
What exactly is meant with the follow-through move here? Is it how far the price will go beyond the resistance or support once they break?
If so, am I correct in assuming that based only on the information on how strong the support line was (ignoring additional information/other important parameters) the price is expected not to go as much under the support line, if the support line was stronger compared to a weaker line?
Yes, generally speaking a strong support/resistance level means one that has been tested numerous times and each time the price has bounced off it. The more times it is tested and holds the stronger it is considered to be - which means more people will be watching it and trading the anticipated bounces…then when it eventually does give way and price breaks throught it then there will be plenty of stops to be hit and more people jumping in with new positions. Therefore the more widely recognised a level becomes the greater the activity when it breaks and the further it will follow-through.
But as you wisely recognise, we are ignoring other factors here. The real issue that dictates the extent of follow-through is the underlying factor that caused the breach in the first place. The technical aspect of the breach will cause an initial response, but that will die out as fewer people are left to enter new positions and profit taking sets in. But if the move is precipitated by a change in perception of underlying fundamental pressures then the follow-through may turn out to be an overall change in direction, the duration of which no longer has any connection with the breach of that S/R level.
The stronger the support/resisteance line becomes, the greater will be the anticipated follow-through because of the greater recognition of it amongst traders.
Actually, @kesLOVErp, I should have mentioned another factor that determines whether a particular support/resistance level is considered strong or weak and that is the timeframe on which it is observed.
A level that is formed by numerous touches on a daily or higher timeframe is generally considered more significant and reliable (until it fails!) than a level appearing on, say, an hourly or 15min timeframe, even when the number of touches is the same. In fact sometimes levels forming on an intraday timeframe wont even appear on the daily chart as they are absorbed within the daily bar/candle.
And, of course, intraday levels are not really so very related to underlying fundamental issues, which generally take time to play out. Therefore, very short term levels are more technically driven and less reliable. In these cases, the extent of any follow-through is more likely to relate to whether the break is in the direction of a longer term underlying trend or against it.
Bring up a chart with only candles on it, any time frame you like. Look for a consolidation pattern where price is trapped inside a upper and lower price boundary with multiple touches of the upper and lower levels. Draw a box or a trend line on both levels to segregate the consolidation zone. Next study what happens after price breaks and closes beyond the lines.
Now typically one of three things will happen. Price will break through and then sharply reverse with a move in the opposite direction. Or price will retest the broken level, bounce off it and continue in the same direction as the break, thirdly price will break through the line and just keep going with out a retest.
With either scenario price will move or follow through for at least a minimum of a 1:1 measured move of the consolidation zone, sometimes 1.5:1 or 2:1,.3:1. As all things probable the more reward you are looking for the least likely it is to happen in percentage terms.
The level that tested for several times and every time the price bounced off for the level is the strong support or resistance level. Its level of strength measured by how many time it has tested. It is easy to use for stop loss because trader can predict where they can jump for new positions. This is why most of the people use the widely used support resistance. But the negative site of this is breach could be placed in the first place here.