What are the signals to look for at 'resistance' levels?

donshale

Can any seasoned investors explain practically what to look for when an Index is approaching, or goes above, a ‘resistance level’?

For example, if you read that an analysis is trying to determine the point of next correction and there is a key ‘resistance level’ at, say 5,500 then what are the signals that the experts look for to judge if the market will correct, or that the correction appears to have been postponed to a higher level (i.e. a change in sentiment)?


a) Does going above the resistance level indicate a change in sentiment, or
b) Does the Index need to stay above it for x number of days, or
c) Does the Index need to go more than x% over, or
d) Does the market hovering under the resistance level for a few days or weeks but consistently failing to breach it signal a strong bias towards a correction?

What are we looking for in terms of signals that an Index has a strong bias towards a correction?

turbobob

Hi, I have done a bit of reading on this but am in no way an expert, I've just scratched the surface really. Here is quite a good article to read http://www.investopedia.com/articles/technical/061801.asp

To answer the questions, IMHO..

a) Not necessarily. One thing that often happens is that old resistance areas become support following the break of resistance..
b) I would say resistance is broken when the price closes above it. If you are looking at a daily chart it would be a day closing above the resistance.
c) No
d) Can do. But equally what you describe could be followed by push through through the resistance. Periods of low volatility are usually followed by a large move in one direction or another. Sometimes you get patterns like this ascending triangle - http://www.investopedia.com/terms/a/ascendingtriangle.asp

One thing I would say is that there can be indicators a correction is coming. Things like how far the index is away from a long term moving average (a 200 day SMA is commonly looked at) could give some clues. If you look at a long term chart of the FTSE100 linked below it has periods where it moves away from the average, and then corrects closer to it. As you might notice the index is currently quite a way above its 200 day average..

http://finance.yahoo.com/q/ta?s=^FTSE&t=5y&l=on&z=l&q=l&p=m200&a=&c=

purch

b) I would say resistance is broken when the price closes above it. If you are looking at a daily chart it would be a day closing above the resistance

Technical Analysis of markets can be a minefield, and there are numerous different angles and opinions, and most of all methods.

Some methods would require just one close above a level, other methodologies would want to see 2 or 3.

The most important trap to avoid falling into, is to use different methods at the same time, (which is the trap of making the analysis fit what you want to happen).

donshale

turbobob wrote: »

Hi, I have done a bit of reading on this but am in no way an expert, I've just scratched the surface really. Here is quite a good article to read http://www.investopedia.com/articles/technical/061801.asp

To answer the questions, IMHO..

a) Not necessarily. One thing that often happens is that old resistance areas become support following the break of resistance..
b) I would say resistance is broken when the price closes above it. If you are looking at a daily chart it would be a day closing above the resistance.
c) No
d) Can do. But equally what you describe could be followed by push through through the resistance. Periods of low volatility are usually followed by a large move in one direction or another. Sometimes you get patterns like this ascending triangle - http://www.investopedia.com/terms/a/ascendingtriangle.asp

One thing I would say is that there can be indicators a correction is coming. Things like how far the index is away from a long term moving average (a 200 day SMA is commonly looked at) could give some clues. If you look at a long term chart of the FTSE100 linked below it has periods where it moves away from the average, and then corrects closer to it. As you might notice the index is currently quite a way above its 200 day average..

http://finance.yahoo.com/q/ta?s=^FTSE&t=5y&l=on&z=l&q=l&p=m200&a=&c=

Thank you - really useful charts and info!

donshale

purch wrote: »

Technical Analysis of markets can be a minefield, and there are numerous different angles and opinions, and most of all methods.

Some methods would require just one close above a level, other methodologies would want to see 2 or 3.

The most important trap to avoid falling into, is to use different methods at the same time, (which is the trap of making the analysis fit what you want to happen).

Good point to make. Thank you.

tradetime

donshale wrote: »

Can any seasoned investors explain practically what to look for when an Index is approaching, or goes above, a ‘resistance level’?

For example, if you read that an analysis is trying to determine the point of next correction and there is a key ‘resistance level’ at, say 5,500 then what are the signals that the experts look for to judge if the market will correct, or that the correction appears to have been postponed to a higher level (i.e. a change in sentiment)?


a) Does going above the resistance level indicate a change in sentiment, or
b) Does the Index need to stay above it for x number of days, or
c) Does the Index need to go more than x% over, or
d) Does the market hovering under the resistance level for a few days or weeks but consistently failing to breach it signal a strong bias towards a correction?

What are we looking for in terms of signals that an Index has a strong bias towards a correction?

Originally Posted by purch
Technical Analysis of markets can be a minefield, and there are numerous different angles and opinions, and most of all methods.

Some methods would require just one close above a level, other methodologies would want to see 2 or 3.

The most important trap to avoid falling into, is to use different methods at the same time, (which is the trap of making the analysis fit what you want to happen).

Is a great answer, possibly the most important thing to understand about technical analysis is that it is subject to interpretation, and thus it is an art not a science, as such there is no simple answer to your question. If we take support and resistance levels for example, there is only one thing we can say with any degree of certainty, and that is that sooner or later they will all be broken. The significance of that rather obvious statement, is that whenever you use technical analysis as a basis of trading decisions, then you have to protect your self against the risk of a failure in order to minimize loss.

You ask for a response from "seasoned investors" I am not sure if that is just a figure of speech or if you asking the question from the perspective of an investor, who for my definition would seek to hold stocks for years. The reason I mention this is that to be honest I would not imagine technical analysis would be a huge amount of use to an investor in the way your question is worded. An investor bases his decisions primarily on fundamental analysis, ie whether the stock he owns or wants to own is cheap relative to its peers and it's prospects, and thus either it is or it isn't, if it is, you continue to hold it, and if it no longer is, you would sell it.

From a trading perspective, since I am not an investor (seasoned or otherwise) I personally would answer your questions as follows:

a) Does going above the resistance level indicate a change in sentiment,

Not necessarily, the "testing" of a resistance level will frequently involve price moving above that level at least temporarily, since whilst a resistance level is often quoted as being a specific value, such as the 5500 you mentioned, it is really an area.

b) Does the Index need to stay above it for x number of days

Personally for me if I were looking to take a "swing trade" (a trade lasting days to weeks) it comes back to interpretation, what sort of market are we in currently, if we are in a raging bull market, as we are currently I will accept a daily close above the resistance area, preferably on increased volume, and I will be prepared to buy the break of that days high in the next trading session. If however we are in a ranging market, I would probably want to see a couple of daily closes above, and buy the first pullback towards what was the resistance level, it rather depends a lot on how aggressive you are.

c) Does the Index need to go more than x% over

For me, personally, no, not really.

d) Does the market hovering under the resistance level for a few days or weeks but consistently failing to breach it signal a strong bias towards a correction?

Not particularly, imho, , in such a circumstance you have an equilibrium reached between buyers and sellers (demand and supply), one will win out, you can never be sure which one until the breakout or break down, though, how the market moved preceding the consolidation may provide clues.



As a rough rule of thumb, you want to identify the big picture trend and then act accordingly. In bull markets, you look to buy support, in bear markets you look to sell resistance. Currently we are in a raging bull phase, buying dips is a much better risk reward proposition than trying to sell resistance. That though is a traders perspective, form an investors perspective, I don't really know how much of that you can apply with any degree of success.

donshale

tradetime wrote: »

Is a great answer, possibly the most important thing to understand about technical analysis is that it is subject to interpretation, and thus it is an art not a science, as such there is no simple answer to your question. If we take support and resistance levels for example, there is only one thing we can say with any degree of certainty, and that is that sooner or later they will all be broken. The significance of that rather obvious statement, is that whenever you use technical analysis as a basis of trading decisions, then you have to protect your self against the risk of a failure in order to minimize loss.

You ask for a response from "seasoned investors" I am not sure if that is just a figure of speech or if you asking the question from the perspective of an investor, who for my definition would seek to hold stocks for years. The reason I mention this is that to be honest I would not imagine technical analysis would be a huge amount of use to an investor in the way your question is worded. An investor bases his decisions primarily on fundamental analysis, ie whether the stock he owns or wants to own is cheap relative to its peers and it's prospects, and thus either it is or it isn't, if it is, you continue to hold it, and if it no longer is, you would sell it.

From a trading perspective, since I am not an investor (seasoned or otherwise) I personally would answer your questions as follows:

a)Does going above the resistance level indicate a change in sentiment,

Not necessarily, the "testing" of a resistance level will frequently involve price moving above that level at least temporarily, since whilst a resistance level is often quoted as being a specific value, such as the 5500 you mentioned, it is really an area.

b) Does the Index need to stay above it for x number of days

Personally for me if I were looking to take a "swing trade" (a trade lasting days to weeks) it comes back to interpretation, what sort of market are we in currently, if we are in a raging bull market, as we are currently I will accept a daily close above the resistance area, preferably on increased volume, and I will be prepared to buy the break of that days high in the next trading session. If however we are in a ranging market, I would probably want to see a couple of daily closes above, and buy the first pullback towards what was the resistance level, it rather depends a lot on how aggressive you are.

c) Does the Index need to go more than x% over

For me, personally, no, not really.

d) Does the market hovering under the resistance level for a few days or weeks but consistently failing to breach it signal a strong bias towards a correction?

Not particularly, imho, , in such a circumstance you have an equilibrium reached between buyers and sellers (demand and supply), one will win out, you can never be sure which one until the breakout or break down, though, how the market moved preceding the consolidation may provide clues.



As a rough rule of thumb, you want to identify the big picture trend and then act accordingly. In bull markets, you look to buy support, in bear markets you look to sell resistance. Currently we are in a raging bull phase, buying dips is a much better risk reward proposition than trying to sell resistance. That though is a traders perspective, form an investors perspective, I don't really know how much of that you can apply with any degree of success.

Thank you for taking the time to provide such a comprehensive and informative reply.

When you talk of buying support and selling at resistance (i.e. I interpret as buying at the dips and sell at the peaks) it sounds like you mean as a regular trader - maybe buying and selling dips and peaks during the day as well as over longer periods?

You are right that I ask the question more as an investor than trader. I have a lump sum invested in a tracker. At present the bull market has increased my capital. I know timing the markets is impossible, and the advice to investors (rather than traders) is to stick it out for the long term. However, even as an invester, I would like not to see all the profit of the past 3 months drain away if the market peaks and turns bear. I would like, of course, to sell at the right time, and then buy in after the next correction - assuming there will be one.

So, as an investor, I was looking for what signals I may look for to establish where the current levels of resistance are, and signals to look for that the market has peaked and is turning. I know we are well over the 200 day moving average - but we seem to have been there for a while longer than I would have expected already and no clear sign of correction yet.

Thank you again for sharing your knowledge.

sabretoothtigger

Investing can use TA but its second to more factual consideration, like for an index it might be economic factors.

TA could estimate how far extended this market is and also how important the volume is and has been. Going off this I estimate 4500 as a strong level


TA can work because natural systems can be estimated and as a human is behind every buy and sell the stock market is a natural system with predictable levels of confidence to its movements.
Theres no definites but the correct odds of an incidence could be improved through TA.


The reason TA is best applied short term is a share price is just a price tag

The problem is the price relys on perception and sentiment but theres also a separate systems determining the underlying actual value.
So 2005 the mortgage securities might have been bullish but the fundamentals were crap and TA could apply to that fundamental underlying housing market as well as the share price. Then theres another system of money supply within a country and globally, thats another TA saying up or down.

So personally I think it takes about 6 different takes on an investment to actually know if its good or not. TA can apply to everything human or naturally based as its basically just statistical analysis but each separate system can be in conflict and ultimately they have to be weighed against each other in their influence & across varying time frames /seasons



I wont really give an opinion on up or down from here because this is not a free market really. We have artificial movement in money supply both here and abroad.
Apparently the slight blip down now is due to usa federal bank not printing money any more and also reducing purchase of mortgage securities. Its like they dropped a hammer on the weighing scales and all the careful market measurements dont really matter any more. Cant TA political risk really though politicians are fairly predictable I guess

On a basic level its best to own something I think cash is the worst investment of all, the text on it explains why

Number one rule is keep your own opinion as more then ever no one knows what will happen. The market is very divided in its estimates imo but if you read the FT it wouldnt do any harm and bloomburg because it represents the mainstream

http://www.youtube.com/watch?v=47Lm9sxCJYE

I was looking for what signals I may look for to establish where the current levels of resistance are

If you take a chart for the year draw a straight line across it and touch as many mountain peaks and troughs as possible. Thats the resistance/support price.
High volume confirms a move and that is resistance /support for the future also. So make it as simple as possible like dot to dot, you want to form a picture

http://bigcharts.marketwatch.com/advchart/frames/frames.asp?symb=uk%3Aisf&time=8&freq=1





Best not taken too seriously

turbobob

There's also the Fibonacci retracement levels (click link for explanation) which seem to act as support and resistance more often than could be attributed to chance, on the FTSE100 anyway. I don't know why, but if they work...

tradetime

donshale wrote: »

Thank you for taking the time to provide such a comprehensive and informative reply.

When you talk of buying support and selling at resistance (i.e. I interpret as buying at the dips and sell at the peaks) it sounds like you mean as a regular trader - maybe buying and selling dips and peaks during the day as well as over longer periods?.

Yes, I am a retail trader (self employed) for some 9 years. I primarily trade intraday index futures, DAX, S&P500, and Nasdaq. Also from time to time I trade longer term "swing trades" running days to weeks, mainly sector ETF's on US and foreign markets.

donshale wrote: »

You are right that I ask the question more as an investor than trader. I have a lump sum invested in a tracker. At present the bull market has increased my capital. I know timing the markets is impossible, and the advice to investors (rather than traders) is to stick it out for the long term. However, even as an invester, I would like not to see all the profit of the past 3 months drain away if the market peaks and turns bear. I would like, of course, to sell at the right time, and then buy in after the next correction - assuming there will be one.

So, as an investor, I was looking for what signals I may look for to establish where the current levels of resistance are, and signals to look for that the market has peaked and is turning. I know we are well over the 200 day moving average - but we seem to have been there for a while longer than I would have expected already and no clear sign of correction yet.

Thank you again for sharing your knowledge.

Investment is not my thing, but I do understand your dilemma. Levels of resistance / support that technical analysts talk about come in many forms as mentioned by the guys above, horizontal price s/r, moving averages, Fibonacci retracements and extensions, trend lines, and a whole lot more exotic stuff. The problem for an investor, is that all support and resistance levels will be broken sooner or later and there is no way to be certain which ones will hold and which ones will fail, so even though you have identified a resistance level what do you do, exit? If you exit and it fails and price pushes through, can you feel confident enough to re-enter? Which is why I say it works better for traders who are used to entering and exiting positions frequently, than investors.
For an investor, who is predominantly a long only participant, support levels are of more significance, since a break of a major support level would likely produce a more significant correction. Unfortunately the fierce rise in the global markets means significant support is quite a long way away. If I were an investor in the current market I might consider selling part of my position to lock in some profit, and / or buy some insurance in the form of put options, if it were price practical, on perhaps a March expiration. No matter how you do it, it will cost you either some current profit, or some future profit. All in all it always comes down to judgement

Blah99

Buy a book called Charting by Alastair Blair. Will help you understand and visualise the thought process behind TA, but personally TA is secondary to fundamentals for me.