The Master Swing Trader: Support and Resistance

Farley goes on to talk about S/R. His basic definition has fudge factors built in, he talks about elasticity, and load factors (that is traded volume at the S./R point). The first important point he makes is that S/R points may not be price pivots, it may rather be short sellers getting in at a particular point or funds buying in to momentum. His second point is that S/R parameters, each by itself, is weak, and the more that add up at a particular price, the stronger the S/R point becomes.

His first S/R parameter is horizontal price marks, where on a price chart there may be price pivots at the same price value happening at different times. He says that when these happen with high volumes, it is a strong S/R parameter.



He discusses the moving averages, 20, 50 and 200 day. I reviewed my 600-list of stocks with the 20, 50 and 200 day moving averages, and found more violations than S/R’s, when using this single parameter.. He also uses EMAs or Exponential Moving Averages in some of his examples, and I did not evaluate that parameter.

He mentions Fibonacci numbers as an S/R parameter. Again, an evaluation of retracements showed far more violations of the Fibbonacci numbers as valid S/R points. (Fib numbers (38.2%, 61.8%, 70.7%, 78.6%, 84.1%.) For example here’s my favorite short X again, the fib levels were not hit on the retracement.



He mentions whole numbers as an S/R parameter. Like the Dow 12000 hat being a major S/R point. On my evaluations, I did find quite a number of even-dollar’ed pivot points (of course many more violations as you can logically imagine) but it was interesting that at these dollar points, how often it was a turning point for the stochastics. So, never put your stop at an even dollar point. Pick a point above or below, depending on if it’s a short or long.

As I said earlier, he uses volume as an S/R parameter. Again, volume by itself may or may not coincide with a price pivot. He mentions the volume must be substantially heavier than the average volume for that time period (daily, 60 minute, etc). His point is that when there is substantial volume above a period/s normal average volume, that establishes a lasting effect on price.

He talks about the channel boundaries that establish the trends, and how weak these particular boundaries are as an S/R parameter. Farley talks about (but does not elaborate on) the studies of central tendency as attempting to define S/R. He mentions that mathematical statistics of central tendency studies divergence from a central price axis. I googled around and found nothing, and my prob and stats book is long gone. But this interests me, and maybe I’ll ask my applied math friend at work, I’m sure he knows everything about this. :-)> And for a free lunch, will elucidate me. :-)>

And finally, Farley uses the term “fade” enough for us to get a definition. If you’ve ever heard “fade the stock”, it means reduce your position as the price heads for a S/R point.

There’s one more thing I’d like to mention about S/R. I have set stops below S/R points, not fading my position, but completely getting out; I guess you may call it a “hard stop”. I have seen more than a few instances where the price inflection point has turned around at the S/R point I expected, but one trade has gone below that point, and mine was the only order executed at that lower point. This leads me to believe that an operator may know the price is turning around because of order movement and bid/ask movement, and he reaches down to buy a single large block to put in his account as the stock turns. Since I have seen this several times, now I fade the stock at the S/R point rather than setting one stop loss order. This may be a special case of the hammer pattern (remember that one?)

I have read many traders who seem to feel that S/R points remain in place over extended periods. I read Barry Ritholz’s post in Buzz and Banter where he said “we go back to the support point from last April” or something like that. I’m wondering if these long-term S/R points have any merit at all, and I’m wondering what the effect of a trending market has on those S/R points. In other words, if there’s a horizontal large volume price inversion last April, and now the S&P is 20% higher, how that 20% affects that particular S/R point. I’m thinking it must. I mean, if the market’s up 20%, I’m going to set my stop 20% higher, so it’s logical to think the S/R point tracks the market.