Law of Polarity: Understanding the Demand-Supply Equation in the Markets!

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Description: The stock markets are battlegrounds of power. Here, battles are fought everyday between the buyers and the sellers to take control of the market. This constant tug of war creates some invisible lines or zones of support or resistance which when breached undergo a role reversal and start acting just the opposite way around due to a shift in the power balance of the demand-supply equation. This shift in the power balance is termed as the Law of Polarity.

In simple terms, we can say that once a resistance level is broken, it changes its role and starts acting as a future support level. Conversely, once a support level is breached, it starts acting as a future resistance level.

The million dollar question is, why does this phenomenon happen?

The simple answer to this question is due to a shift in the power balance between the demand and supply present in the market.

Let’s try to understand this concept with the help of an example.

In the above example of Reliance Capital, we can see how once the old resistance was taken out it started acting as a support level. This happened because those who had bought at the old resistance area were actually trapped into bad positions. They waited patiently for the prices to reach that level again to get out of their holdings. When price eventually reached the old supply area, the trapped buyers offloaded their stakes. However new demand came in and absorbed that supply. As a result volume increased on the breakout. Subsequently, when prices returned to test the previous resistance area, those who had bought on the breakout defended their positions and supported the stock from further declines resulting in higher prices.

A very similar story unfolds in case of a support area turning into a resistance zone.

In the above example of Reliance Power, once price reached the old support area, old supply came in as trapped buyers offloaded their shares which overwhelmed new buying and price declined on increasing volumes.

Now, once prices returned back to the old support level, those who were locked into bad positions earlier decided to offload their holdings creating a resistance zone for the stock and prices declined further.

The Law of Polarity is a very simple yet very powerful concept to apply in the stock markets. Once understood correctly, the interplay between demand and supply can be gleaned off the charts by a seasoned technician.

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Follow Abhijit Paul:
Abhijit prefers to define himself with the 3is – investor-trader, instructor and influencer. He has over 14 years of experience in the Indian Financial markets, and is currently, a SEBI Registered Research Analyst and an active trainer. He offers unparalleled services in both training and advisory.

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