I really want to revisit this topic because while it is the most simple and basic concept in technical analysis, many traders have no clear idea what they are and how to use them. There is this one trader I know that has them backwards all together. He calls support resistance and resistance support.
While both lines or price levels do the same thing as you approach them. They repel the price movement. Support is the price level from which the price bounced from. It is the level that you approach when selling off. Resistance is the line that stops the price from moving further up. It is only natural, that once you have overcome resistance, it becomes support, because now price action is above it. In the same vein, once support is lost, on the way back up to it, it becomes resistance, because price action is below it. Not rocket science.
Resistance
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Back in April 2010, the es tried to reclaim the support that we lost back in Sept 29, 2008. At this point es met some resistance. And the week of Nov 1, 2010, the es closed above that candle and gained it as support. However the following week, the es closes below that price level, and once again that price level becomes resistance again. Very simple concepts thus far.
Support
The week of Aug 3, 2009, the es claimed support at 1005.75, which lead us to the April 2010 highs. This support is tested in latter part of June, and first week of July 2010 which lead us to the Nov 2010 highs.
Areas of Consolidation
As you can see in this image, areas of consolidation provide 2 very important pieces of information. The range provides you level of support (at the bottom) and level of resistance (at the top). It is a beautiful thing. As you can see in this example, these levels who played significant roles in the past, will continue to influence the future. In this 5day15min chart, you can see that 1192.75/1193.00 was a support that the es tried to hold back in Nov 19 at 5:30 am est, and again at 6:15am and we finally lost at 7:15am. And then we reclaimed that support again by 11:00am to lead us to the 1206 high. You can how influential this level of support became throughout last week. And because of the North Koreans, we failed to reclaim it and caused the es to sell. You do know I’m being sarcastic about the North Koreans right? Technically we were bound to fail. We will discuss this further in later on..
The top of this consolidation range is the resistance. Again, through out last week this range played an important role of keeping the price contained. Last Monday, we came up past this level, but could not close, and got here on more bearish notes than when we arrived there the first time on the way up back in Nov 18 10:30am est. And so it is natural that it would sell. We again go above it after struggling to get over it all day Nov 24th, by end of day 10:15am. But to hold this high was not possible, because again on even more bearish momentum, so it sold once more.
The channel produced by areas of consolidation provides you a way to identify levels of support and resistance. I could have identified more consolidation areas at each peaks and bottoms, but I just wanted you to see how powerful and useful areas of consolidation can be.
Lets discuss Friday’s action, as an example of application of knowledge gained. You see, some funnymental traders and the news blamed the negative results of the market on the N. Koreans. I suppose that it could be but really, I honestly don’t care to know with regards to trading because, technically the sell was supported.
Since Wed, 10:30 am, the market has lost a lot of momentum during the consolidation. Even as the es got to 1200.50 by end of trading day, the distribution process is quite obvious. The distribution returns the price back to where the left leg started. At that area of consolidation, at around 8:15am on the Nov 24th. And because this was a level of significant support, the price action bounces, with the support of the momentum by 7:30 am that Friday morning. And the accumulation led it to return to where? Back to where the leg down started and the consolidation point at about 2:30am Nov. 26.
By this time 1192.75 is not a support, it is resistance and after a sell, you will not accelerate beyond it at the first try after you just sold. You will require more momentum. It is just how the market moves. But really, we all know technicals is hum bug and there is no such thing as trend because this price movement was in response to N. Korea.
As we continue to discuss S/R in later issues, we will discuss more about what is now really clear and apparent, to you. If market consolidates on its way up, it will respect those areas of consolidation on its way back down. Simple rules of S/R. The higher time frame S/Rs have a lot of history and are more significant.
Aside
I love it when people talk technicals but then start talking about funnymentals. They say, follow the trend but beware of the news! If the news can gum up the trend, was there really a trend to begin with? How can you follow the trend but then it will be completely violated by the news. Does the trend exist? You are caught in a contradictory position with such logic. How can you be trusting a trend when the trend can be violated. Yes, I see, it is covered under market manipulation, PPTs, QE2 and MMs and Obama and Bernake and the North Koreans. Did I leave anyone out? Jorge tells me POMO. Yes! Nothing is my fault I am an exemplary trader … It is all these yahoos who are screwing with me personally!
If the trend did exist and the reaction to the news was within the confines of such trend, then the only reason you did not see it coming is because you had the wrong trend to begin with.
A question was posted by an “expert” trader, why FMM would suggest to have someone look at a large scope of time because he felt it unnecessary. This is the same trader who suggested that you don’t need to see the chart past 1yr. Why look at 180day 1hr why not use a smaller scope.
And herein lies the issue why some people miss the trend all together. People like to put themselves in a small box. Why would you limit your view? If all you used was 1day15min, would you have seen this huge distribution pattern? Unlikely! Progression is a very important thing to see. You must not limit your view. If the market movements has you baffled, cycle through other time frames. And don’t just cycle, zoom in and zoom out! If you can’t see what is developing, you will be caught unaware.
This box that people self impose on themselves is the very reason why they are caught going long just as the market decides to end its rally. It is also the very reason why they are very wary of the “news” and “events”. It is also the reason why they don’t know how to identify and play significant levels. They don’t know the history. They don’t know why there are pivots and ma’s. Anything they can’t explain technically, goes into the X-files, market manipulation and conspiracy theory. Progression tells you how you got to where you are, if progression or history or the price action to the left of your chart is not important, then levels and support and resistance are not viable technical consideration and neither will trend.
And one more laughable statement by another one of those “experts”.
“I don’t trust the doji unless supported by volume.”
It boggles the mind.
Enjoy this post gang! Sorry it took so long :).