Sunday, June 9, 2013

Weekend Review - It was too short

“My opinions may have changed, but not the fact that I'm right.” ― Ashleigh Brilliant
Cocky son of a gun isn't he but with a last name like Brilliant I guess he can be.  So I guess it is time for the obligatory 'Weekend Review of the Markets' where I pretend that my opinions on the market actually matters to anyone.    It's an exercise of the should've, would've and could've and then I pat myself of the back realizing my hindsight continues to be a perfect 20/20!

Instead I thought I would provide an educational post and share my brilliance (no relation to Ashleigh) on finding support and resistance using Point and Figure charting (PnF).

I will use the a series of PnF charts to show how easy it is using this simple tool. Unfortunately, you will need to have a basic understanding of how PnF charts are created. So if you are interested in learning more about PnF charts, provides and excellent introduction here.  I would suggest you familiarize yourself with PnF charting for two reasons 1) to help determine support and resistance in an objective way 2) otherwise you won't have a clue as to what I'm talking about.

This first chart is a traditional chart showing all the price action of the SPX since late 2011.  This is a traditional PnF chart which follows a few simple rules which you can read about here.  Currently the SPX is in a rising column of Xs and to add another X in the same column price would have to trade at least as high as 1650.  If it trades to 1649.99 a box will not be added.  Sorry these are the rules.    To reserve into a column of falling Os price would have to reverse by at least 3 box sizes, a traditional parameter, which is know as a 3 box reversal.  In this case, price would have to move by at least 30 points (box size = 10 points X 3), from the highest X in the current column (1640).  Therefore price would have to trade to at least 1610 (1640 - 30) or lower.

So we can see that price reversed at around 1680 area (actually between $1680 - $1689.99) enough to moving into a falling column of Os to 1640 before price reversed again into a rising column of Xs.  One could argue that the 1640 area was support (actually between 1640-1630.99) since priced reversed in this area.  However, a 3 box reversal is pretty common and does not constitute a significant price reversal.  Remember the goal is to find significant levels of support and resistance to help us trade.   However, price reversed again into a column falling Os and after breaking the previous 1640 area of support prices fell significantly to the 1600 area (which was a previous level of support between 1590-1600) before again reversing.

So lets hone in on the 1640 and 1600 areas of support and resistance and lets change the box size from 10 points to 5 points and begin to refine our support and resistance target from a 10 point range to a 5 point range.  We can now zoom in on the 1645 areas which is still within the 10 point range from 1640 area above.  You can now see that price broke below the 1645 area and then came back up to test that area again before reversing again at that level.  You can also see that 1595 was a level of resistance back in April and that level came into play again just this week when price came down to 1598 to find support. Now we have a 5 point range of 1640-1645 and 1595 to 1600.   Following?

Now don't get me wrong a 5 point range on a 1600+ instrument is pretty good but lets get even closer and jump to a 30 minute chart below.  The box sizes of the 30 min PnF chart is calculated using the Average True Range for the last 20 periods (30mins) and therefore the values will change as volatility changes.  However, if we are looking at significant levels of support and resistance this shouldn't change those levels significantly, if they did then they the are probably not significant or just wrong.  If we look at the 1643.4 area you will see the how price reacts as it breaks and then acts as resistance.  Similarly you will notice our upper range of support of 1600 has been lower to 1598.8. Therefore, we have narrowed the range from 5 points to now 3.8 points or a range of 1595-1598.8 which is pretty darn good.  Getting clearer?

Did you notice how we closed Friday back at resistance 1643.4? Coincidence?  Maybe?  Does it mean price is going to fall?  Maybe? It might go higher. The idea here is to react to what prices do at these areas of support and resistance.  Maybe looking at volume might help in our decision making at these important levels since these area represent the battle of supply and demand.   Maybe that will be my next post. :)

Did this make sense? Then reread it. :)

Thanks for reading.

1 comment:

  1. again love reading your stuff and well written, thanks for pointing the right direction:)