Price rejection occurs when an asset’s price attempts to move beyond a significant support or resistance level but is quickly pushed back, often with increased volume. This observation indicates a strong presence of buyers or sellers at that specific price point, preventing a sustained breakout or breakdown. For example, a cryptocurrency might briefly trade above a key resistance only to close below it, forming a “wick” on a candlestick chart.
Implication
The implication of price rejection is that the previously attempted price movement was unsustainable, and the market is likely to reverse or consolidate. A rejection at resistance suggests strong selling pressure, potentially leading to a decline. Conversely, rejection at support indicates robust buying interest, often preceding an upward move. Derivatives traders interpret these signals as potential turning points for establishing or adjusting directional positions.
Strategy
Traders incorporate price rejection into their strategies to identify high-probability entry or exit points. Upon observing a rejection at a resistance level, a trader might initiate a short position using futures or purchase put options, expecting a downward move. Conversely, a rejection at a support level could prompt a long entry or the sale of out-of-the-money put options. Strict stop-loss orders are essential when trading these reversal patterns.
