Utilizing Support and Resistance Levels - Part 1

Excerpt from Dec. 6th's class:
Complete logs available at http://www.tradingfrommainstreet.com/classes/Class_SRPart1.html

Next Class: Thursday, December 20, 2007 at 4:15 pm ET
http://www.tradingfrommainstreet.com/TradingClasses.html



Utilizing Support and Resistance Levels - Part 1
Applying basic price levels to identify support and resistance levels.

OK gang... let's let going... First of all... thanks for coming! This is the first of a 4-part lecture series on support and resistance. For those of you who have purchased my CD series, the material in this series is going to be a bit of refresher. It will cover some of the main points in the S/R segment of that course, but I have completely new charts, etc., so it will help possibly clarify some of the points as well. I will take questions following the class, so please hold off until then since often I find that many of the questions people have mid-way end up answered by the time I am done anyway. :)

Simply put, support and resistance levels are places in the market when the current trend or price move that is in play in the market will either turn or stall. The traits of support and resistance levels apply to all type of markets and time frames, so the concepts in this class will figure into any market you trade.

Now, when thinking of support and resistance levels, it is very common for most people to think of them in terms of absolute price levels. For instance, if they are looking at $50 as a resistance levels, they mean exactly $50. On the other hand, if they are looking at moving averages as a support level, they will check to see what the exact price of the moving average is, such as $50.78.

In reality, support and resistance levels are not exact prices, but rather price zones. So, if the resistance level is $50, then it is actually the zone around that $50 level that is the resistance. The stock may hit only $49.87 or it may hit $50.25 and still hold the $50 as price resistance.

The main factor in determining exactly how much the exact prices are tested by is how quickly or slowly the prices move into that resistance zone. For instance, if the zone hits very quickly on a large momentum surge, then it is more likely to hit that $50.25 level. This is also the case if the stock is a rather volatile one with a wide price range intraday. If the security spikes higher and does not quite hit the price resistance, such as a spike into $49.70, then it may round off into $50 with slightly higher highs and never exactly touch the $50 price resistance zone before turning over due to the slowdown in momentum into that resistance. The larger the time frame, the greater the price zone is as well. A resistance zone at $50 on a weekly time frame may have a range of $1 on each side of $50. Where traders tend to run into trouble is in thinking that because the stock has traded over $50 by more than just 10 cents that the $50 has broken, so we often hear of people "buying the highs" or "shorting the lows" in the case of support.

For today's session I am going to focus on 4 main types of price support and resistance. They are WHOLE NUMBER SUPPORT AND RESISTANCE, PRICE PIVOTS, PRICE CONGESTION ZONES, and EQUAL OR MEASURED MOVES. I will begin with the whole number support/resistance (s/r).

Whole number support and resistance refers to the price levels most of us have in our head when we think of support and resistance right away. They are levels like the 14,000 that we have heard so much talk of in recent months. CNBC does not get excited by the Dow hitting 13,984. We do not hear about oil in terms of the cents per barrel, but rather it's proximity to breaking the whole number level. When a security, or the market overall moves into these larger price levels, rounded to either the dollar in most stocks, or the 10s, 100, etc. people tend to react most often at those levels. It's second nature. My third grader has just spent her first semester in school learning how to average and to round up or down. That is then taken with us throughout our lives.

FIGURE 1 - $DJI Daily
http://www.tradingfrommainstreet.com/images/class/SR_Price_20071206/SR_PriceWholeNumberDJI.gif



For futures traders a common level we will notice in the NQ is how that tends to gravitate to moves of 5 points at a time and stall at or about the 5 point increments. In the YM the 10 point increments, and particularly the 100 point levels catch people's attention and reversals or consolidations tend to form at those zones. In the chart of the Dow Jones Ind. Average (Figure 1) we can see how it often moves towards those 100 point increments as well. The 12,000 and 14,000 level are the most pronounced in this case, but many of the places it stalls at are almost exactly at a 100 point price level.

Even though at "D" the Dow technically broke 14,000 in terms of the exact price (yet held the 14,200 securely) when we think of the Dow in terms of a larger time frame move, we have yet to see the 14,000 zone penetrated. At 14,200, the Dow was STILL AT the 14,000 price resistance zone. What I am looking for at this point is a third test of that zone, maybe even a slightly higher high and then a larger correction where we can see a stronger reaction to this price resistance zone on a larger time frame.

... continued at http://www.tradingfrommainstreet.com/classes/Class_SRPart1.html

Next Class: Thursday, December 20, 2007 at 4:15 pm ET
http://www.tradingfrommainstreet.com/TradingClasses.html

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