If you think about it, that's hardly surprising: if a downtrend is defined by lower lows and lower highs, then the break of a prior support level in the background would tend to confirm that the downtrend is still valid, whereas a failure to break that support would suggest at least a correction is underway, if not possibly an outright reversal.
In the following chart, we see an Old Low which represents a support level ending a pullback in an uptrend (marked by the long green arrow, left to right). After the top had been created and the market reversed into a downtrend, the first major pullback on the way down started on a bounce off of exactly that same support level, as indicated on the right side of the chart. Given the strength of the trend, however, that support level held for only a short while, and when price breached it to the downside, further confirmation was provided that a bearish trade is still valid.
In between those events, we also see an Old High from which price initially pulled back quite substantially (marked by the shorter red arrow). Another rally attempt came later, but ended exactly at that same Old High, which represents resistance. It' is as if the market realized that if the level could not be breached further to the upside, then long positions were ready for liquidation. In traditional terms, this could be called a Double Top, while in Elliott Wave theory we could call this a Truncated 5th. Either way, the implication is the same - the end of an uptrend on an Old High serving as resistance.
One of the most important aspects when using Old Highs & Lows is that we need to look for them on all the time frames that we work with, from Monthly down to hourly and below. For instance, an Old Low from five years ago on a Monthly chart, will not be apparent on a Daily chart, which might leave you scratching your head as to why price bounced off that level if you missed it on the higher time frame. Therefore, we always look for these reference levels everywhere: another reason why top-down analysis is so crucially important.
Another useful aspect of Old Highs & Lows - like any other form of support/resistance - is that when they are breached, they usually (but not necessarily always) become their opposite, a reflection of the so-called polarity principle. This means that a support which is broken in a downtrend becomes resistance, while a resistance which is broken in an uptrend becomes support. This is useful for us to identify potential levels that mark the end of corrective pullbacks, i.e. the points at which we sell the rallies in a downtrend or buy the dips in an uptrend. Once a broken support is turned into resistance, price may come back to that level from the other side, test it, and if that test is successful (meaning price did not go back through again), it is free to continue on in the direction of the higher level trend.
In the chart below, we see three instances (each colour coded) of where, after the market headed into a downtrend, a specific level of support was encountered, price later breached that Old Low, and then later still came back up to test the broken support as resistance. In all three instances, the test was successful, which confirmed the trend and set up a potentially great opportunity to sell the rallies.
On this chart example, the lowest low on the far right (which did not even come close to marking the ultimate bottom) was at the 1.7566 mark. A short entry at resistance on Old Low #1 (price: 2.0282) was worth up to 2,716 pips. A short entry at resistance on Old Low #2 (price: 1.9811) was worth up to 2,245 pips. A short entry at resistance on Old Low #3 (price: 1.8614) was worth up to 1,048 pips. In total, three opportunities for a scaled-in position trade worth more than 6,000 pips in a little over one calendar month!
Of course, application of this principle on lower timeframes will result in smaller sized opportunities, but you probably get the idea. Broken support followed by a retest of Old Lows as resistance can offer up great selling opportunities in a downtrend, just as broken resistance followed by a retest of Old Highs as support can offer up great buying opportunities in an uptrend.
Identifying Old Highs & Lows On Your Chart
So how do you apply this principle? First, you need to simply train your eyes to see Old Highs & Lows on your chart. It's an art rather than a science, but because there are so many places where price bounces around, it really comes down to filtering out the 'noise' and looking for evidence that the market really did react significantly at the level in question. In other words, a sharp move in one direction, followed by a sharp reversal in the opposite direction (and/or a measurable price rejection wick), will serve as a valid Old High or Low.
This in turn implies that it's most efficient to look for levels that will confirm the trend reading you think you see: if in a downtrend, you want to look for Old Lows to be broken as support, and tested successfully as resistance; if in an uptrend, you want to look for Old Highs to be broken as resistance, and tested successfully as support.
By now, you may be wondering whether Old Highs & Lows bear any special relationship to the concept of Swing Points. The short answer is: Yes, absolutely. In fact, they are often one and the same. If Swing Points tend to mark the start and end of wave structures, and these structures in turn are either impulsive (aligned with the higher degree of trend) or corrective, then Old Highs & Lows in the background where the market reacted sharply should also be denoted by Swing Points. If not on one higher level chart, then when drilling down lower - it's absolutely guaranteed that on at least one timeframe the Old High or Low will be delineated by a Swing Point structure.
Whether as an analytical practice, or preparing your charts ahead of an actual trade, a simple yet effective way to capture Old Highs & Lows is illustrated below.
First circle them where you see them, then draw a horizontal line out from the candle wick marking the price extreme (the high or low) with an extension through the right-hand side of the chart. To make things obvious, you may wish to initially color code lows in green (for support), changing them to red later when they are broken and tested as resistance; and vice versa for highs (red initially, then green). As the market eventually moves further off these levels, they can simply be erased from the chart to avoid clutter.
