What is a support level? 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. The weekly chart of BHP Billiton (NYSE:BBL) provides a good example of a support level. Let’s take a look.
The support zone can be easily identified on this chart. As you can see, prices have bounced up three times already after reaching the space between 17.00 and 16.50. Furthermore, it looks like they are headed down for a fourth try now. The question is should we always expect the support to withstand or not? And if not, how could we prepare for an unreliable support? That is where the Elliott Wave Principle can help. Below you will see the same chart of BHP Billiton, but this time with an Elliott Wave labeling.
Note that there is a clear five-wave decline (1-2-3-4-5), followed by a three-wave retracement (w-x-y). According to the theory, after every such 5-3 cycle, we should expect prices to resume the trend in the direction of the five-wave sequence. In this case to the downside. The least we should expect is a new bottom below the one, left by wave 5 of the decline. In other words, the support level of BHP Billiton is likely to be broken.