Support and Resistance: Trading in Foresight

[DbPhoenix]

Based on recent comments and questions in the chat room, it's become clear that the two threads in the Wyckoff Forum which are most focused on support and resistance (here and here) have succumbed to the Dreaded Thread Bloat, having become too long to read. This does not imply, however, that we will begin again. Rather I will ask those who are interested in this subject to read the following entries in my Blog:

Trading By Price

Auction Markets

Getting Down to Cases

Supplementary Reading: Support & Resistance and Trading Trend

Those who are really interested can read the posts in the abovelinked threads, up to a hundred-fifty each (or at least the Most-Thanked Posts in those threads, considerably fewer).

Those who have questions that are answered in the above material will be referred to the above material. Those who have questions that are answered in the above material but who do not wish to read the above material will be given a copy of our home game and our best wishes. Questions that are not answered in the above material will be answered to the best of our ability (by "our" I mean any or all of those who are doing this and are as capable of answering the questions as I am). In this way, the thread may be kept short, sweet, and readable, escaping the Dreaded Thread Bloat.

The purpose of all this activity is to show how one can apply Wyckoff's notions of trend, trading ranges, support, resistance, and the importance of midpoints to actual trading, and not only trading, but trading in foresight, not just hindsight (where everything is clean and perfect and smells as fresh as an alpine forest). I've done this before, but the posts are buried in too-long threads, and perhaps this time I can make it even simpler.

The point of all this, of course, is to plan one's trades in advance, thus avoiding the headaches resulting from the head-banging associated with CouldaWouldaShoulda. The next post, therefore, will address the plan for tomorrow.

[DbPhoenix]

We begin with the macro, here using a 100,000 Constant Volume Bar (CVB) chart. The reasons for using this are two-fold: (1) volume bars don't matter until you get to some level of support or resistance where price is most likely to do something useful, like reverse, and (2) the CVB enables the trader to incorporate overnight and weekend action without having a long seventeen-hour+ trail of nothing going on that takes up unnecessary chart real estate.

I hope it's unnecessary for me to draw the various trendlines that accompany price up to the end-run swing high in May. They aren't particularly relevant right now. The swing high is, as is the month-long process of getting a running start toward making a new high. That swing high provided resistance, which we have since broken.

After having broken resistance, we then began working our way higher, forming a channel. This channel, however, was especially sluggish, each retracement nearly coming all the way back to the point where it started. Therefore, you have an awful lot of trades taking place in this channel, even though it does not provide the rectangular shape of a trading range. Therefore, displaying as it does some of the characteristics of both a channel and a trading range, we'll look at it both ways, the black rectangle being the trading range, with a midpoint of 85.

Resistance then becomes support as price drops back toward 40. This creates a tight, inner trading range (the gray rectangle) surrounded by a looser trading range which incorporates the extremes (the black rectangle). The midpoints of each are about the same, or at least not different enough to matter. Price then drops below support, but bulls aren't done, so they shove it back up again (this is called a "shakeout") in an apparent effort toward a new high.

So far, then, we have 85 as one focus -- the midpoint of that first, large trading range -- and 77 as another, the top of the next, most recent trading range.

Now the relevant lines and rectangles are brought forward to a 10,000 CVB.

Here price found R premarket at 85 today, the midpoint of that first, large trading range. This reinforces its importance, particularly since the effort to make a new high failed, and that becomes a resistance level to watch overnight and tomorrow, as does today's high. Thereafter, price showed the support provided by Thursday's swing high to be important (67), and that has to be watched tomorrow in case the current levels do not hold.

If price drops below the level of the top of the last trading range, at 77 (it found support there at the end of today), then the next destination becomes the midpoint of the range from 67 to 77 (those who follow MP will likely find a POC here). After that, 67 again. If that doesn't hold either, then the midpoint of the last trading range, at 57, which is also Wednesday's swing high (and probably another MP POC). After that, 40 to 35.

So there are the levels to watch. Once price arrives at one or more of them, the trader must then see how traders behave. If price bounces off support, a long might be appropriate, depending on one's own strategy. If it rejects resistance, a short. If it just sits, then so does the trader.

[DbPhoenix]

Premkt update:

Though 85 continues to be an important area due to that trading range at the beginning of the month, that was three weeks ago, and one has to adjust according to current conditions. The market is telling us "by its own action" that 86 may be the more important level (it's only a point difference, but a point means a lot to some groups).

This also illustrates the idea that support and resistance can be strengthened by having been broken if the break fails to hold (here, the break above 86 at 0600). Note also that this is a range bar chart, and that, again, what is important is price movement, not how one chooses to display it.

[DbPhoenix]

Not much to discuss re follow-up. Price rose to R, as anticipated (not predicted; anticipated), then dropped to the bottom of Thursday's and Friday's trading range (tested yesterday), again as anticipated. Then wound up back at R represented by that last major trading range, again as anticipated (though not predicted). This level is also now clearly the midpoint of this most recent range (66 to 92) and assumes the importance attached to a midpoint.

And since we're back where we started, all the S/R levels apply to tomorrow as well.

[thalestrader]

Originally Posted by DbPhoenix Price rose to R, as anticipated (not predicted; anticipated

Very good analysis, Db - Clearly written and readily understandable.

Thank you,

Thales

[DbPhoenix]

Funny, if you have the right sense of humor. A near-mirror image of yesterday, up to a test of R, which failed, then back where we started. Again.

It doesn't take an expert chartist to see that 80+/- is important.


All current S/R levels hold for tomorrow.

[DbPhoenix]

And support and resistance tell us once again what to do and when to do it, all plotted in advance.

Price drops away from 80, down thru 77 to the bottom of last Thursday's and Friday's range (1), then back up for another test of R at 77 (2), then down to S at 40.

Is it really this simple? Yes, if one is focusing on price movement rather than on what one is using to illustrate it.

And since this is the last one, some suggestions for today's entries, on a blow-up of the overnite and morning (these entries are standard and have been addressed in other threads).

First, given the demonstrated weakness, a short off the test of S turned R at 77 (2). This takes place an hour before the open.

Second, a short off S turned R at 67, just before the opening bell.

Third, a short off the springboard which forms just after the open (this lasts slightly less than a minute).

[daedalus]

could you explain what constitutes a "springboard entry"? I searched quite a bit in the Wyckoff forum and the entire forum for that matter (as well as google) for an explanation to no avail.

Just curious what makes a springboard entry. Thanks!

[DbPhoenix]

Originally Posted by daedalus could you explain what constitutes a "springboard entry"? I searched quite a bit in the Wyckoff forum and the entire forum for that matter (as well as google) for an explanation to no avail. Just curious what makes a springboard entry. Thanks!

Springboards are addressed in sections 4, 7, 8, 14, 16, and 21, among those sections which are posted here. To save time, use Ctrl+F. There is also a section in my blog on springboards.

[forrestang]

I have a question, and it is pretty basic. So basic I'm sure it's answered somewhere here, and may or may not be obvious?

But the question is, when planning your day, what do you do when things just don't make sense in terms of plotting your S/R?

I experience this from time to time, I am fairly new at trying to exploit this dynamic of the market (trading mainly with S/R and not much else). There are times when I am planning my day the night before, and things just..... COME TOGETHER.

I.e. it just makes sense..... One can say, "Oh, I see this area.... the areas are clearly defined.... we have consolidation here.... we have a trend there... clearly there is Resistance here above!"

But there are times that things don't really make any sense. When I feel like the market is throwing too much information at me with regards to where one can expect price to react one way or the other.

Often times when this happens, I find myself having so many areas on my chart that it begins to resemble a tic chart, with something occuring at almost every price point, which then becomes cumbersome to me making a decision.

So I will usually delete all annotations and start over. This sometimes helps, other times not. I enjoy the idea of being able to almost fully plan what I will do the day prior once price gets to a certain place, and trying to trade according to what price does once it gets there.

I guess this is not a purely technical question that I am asking, as there is plenty of info in this particular section and many others. I don't know if it's just lack of experience, a physio-logical chemical brain fart of some sort due to lack of proper caloric intake for the day, or if there is really nothing there that is clear?

Like tonight here is what I am looking at, which might not be the best example? I usually have plenty of things to write on my charts, but tonight might be one of those 'brain fart' nights: