The NASDAQ Composite broke through resistance last Friday and as you can see from the inset chart, that level has now become support. (We examine the reasons for resistance and support levels in this week's tip below.) The support level was tested on Monday and Tuesday this week and looks as though it will be tested again. If the index falls through support then the 2880 level will again become resistance.

In the very short term, the vote in the Greek parliament this weekend will affect stock prices on Monday, but even if the vote supports the latest proposed austerity measures, it is unlikely to satisfy Germany, who have already said that the proposal is insufficient, so uncertainty will continue. The austerity measures throughout Europe are threatening another recession which cannot be good for the US economy either.

 
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Why Resistance Becomes Support and Vice Versa

Looking at the inset chart we see that volumes were above the 50 day average in the four days prior to the index breaking through resistance last Friday. Those buyers will be satisfied with their purchases and will look to add to their positions. The heavy volume suggests that there are quite a few of them. Those that didn't buy into the market may be wishing they had and will be looking for a buying opportunity.

This opportunity presents itself as some traders take profits and prices fall to the support level, at which point buyers enter the market who believe in "buy the dip". Prices now rise again and short term traders again take profits, leading to another buying opportunity. You can see that this scenario played out on the first three days of this week. The tails on the candlesticks show where the lows of the day were, which was the point where buyers entered the market. If the index falls to the 28880 level again we may see another replay.

As prices start to fall to the support level the number of sellers, possibly swelled by short sellers, my increase to the point where sellers overwhelm those who are buying the dip and support will be broken. As prices fall through the support level then the scenario reverses. As prices fall, there will be those that hold on but will look for an opportunity to cut their losses. This opportunity will present itself when sufficient traders think that prices are now undervalued and enter the market as buyers. As the prices rise, the former support level will be seen as a selling opportunity and so it now becomes a resistance.