Market Charts Support/Resistance Tables (how they work)
The daily Support-Resistance (SR) commentary is best used to locate where intraday trends may reverse direction; the tables are posted at the end of each report. The SR table levels inform us of the strength of the trend and where that strength may run out of momentum. Support and resistance are actually the same thing, differentiated only by whether the level is being attacked from above (support) or below (resistance). These proprietary tables give you SIX levels each for support or resistance.
Basically the table is a series of Fibonacci ratios adjusted for volatility and this is what makes this table so unique. Each time period's volatility is related to the previous time period's volatility by the Fibonacci ratios. What I have discovered is certain ratios tell us what the strength or weakness is in the markets. I have named these levels for what they are telling us about the markets movements.
Using the tables. To use the tables begin at the right side and note where the S&P cash index is at. The close 4-17-07 was 1471, between pivot and maximum. What level is below it and what is next above it? 1490 above and 1462 below. Move left to the next time period weekly and look for a similar price level. Weekly maximum is also 1471, so you know we are at resistance on a weekly basis with support at 1462 and higher resistance at 1492. As you look across the table you will find a few matches within 3 points of each other. Look for these alignments to locate longer-term support and resistance.
The long and short levels indicate the trend direction for each time period. Looking at the SR table below, starting on the RH side year 2007 Exit short/Go Long is 1426. We would be long the market above 1430. These alignment zones across the market define where solid support and resistance will occur.
LEVEL EXPLANATIONS:
EXTENDED........ This is the pivot level extended by a ratio of one. (.618 & 1.618)
MAXIMUM.........Third level and the max expected for the time period
PIVOT...............Second level and most important. Markets will make or break down here
TESTING...........First level of resistance, fail at up-test results in a move to down test
LONG ...............Above equals UP TREND
EXIT SHORTS .... Stop level for short positions taken during the time period
PRV CLOSE....From the previous close two levels are used for trade direction
EXIT LONGS.....Stop for longs taken during the period
SHORT ............Below equals down trend
TESTING...........First level of support
PIVOT...............Second level of support
MAXIMUM ........Third level and the max expected for the time period
EXTENDED.........This is the pivot level extended by a ratio of one. ( .618 & 1.618)
The EXIT levels above and below the previous days close have a dual purpose. At the open of the day the one exceeded sets the trend until the opposite level is exceeded. For example if we closed at 1471 and we opened below EXIT-LONGS 1471 the early trend is down. You would look for evidence we would continue going down and day trade from the short side only.
Use the EXIT-LONG level to enter a short sale day trade and use the EXIT-SHORT level as the sell stop for the trade. The minimum expected drop is to DOWN TEST when EXIT LONGS is exceeded. Most of the time it goes to DN-PIVOT however cover at the TEST level when you get it if one contract is what you trade. More than one cover half at the TEST level. The second use of EXIT levels is the stop out of the trade from the opposite level. Using the 1471 level again say you did not make it to TEST 1469 and instead moved above EXIT-SHORT 1472, that is the spot to exit the short trade and is why I call it exit short. Each level is named after what it represents for the TIME PERIOD (daily, weekly monthly). Another use of the EXIT levels occurs at the OPEN for the days trading. If a market gaps to or above the EXIT level and then fills that gap you have two strategies. If it looks good to you using your methods trade the opposite EXIT level or wait until the open price is hit the second time.
The next level is called TEST because the traders are testing the DOWN or UP strength of the market. Many times you will see the move stall at this level, if it does go through it then expect the move to go to PIVOT before any reversal. In a monthly up trend if DOWN-TEST 1398 supports a wave down expect a move back to at least LONG 1435.
Next comes the most important level, PIVOT is the location where markets either continue or reverse direction. You also look for PIVOT levels to reverse polarity once exceeded significantly. For example if UP-PIVOT is exceeded and at least one hours trading has a low of the hour higher than the PIVOT level you can say it has been significantly exceeded and it should now SUPPORT the market for the next wave up. If you are familiar with Fibonacci ratios you know the .618 is the most important ratio. The table is made up of Fibonacci ratios above and below the pivot level of .618 and is adjusted for volatility.
MAXIMUM is the level you can expect strong moves to stop at. If you see the market fast move through all the other levels and reverse at max trade it the opposite direction. If it moves to max in a slow trending move expect the EXTENDED level to be achieved. If a daily maximum level is exceeded then shift to the weekly level just above the daily max level for the next resistance or support.
EXTENDED is 1.618 times the PIVOT Fibonacci level. This level is only achieved during third wave impulse waves or "C" waves during corrections. SPREAD is the point distance from up-max to down-max. When this value is less than 20 and close to 10 for the S&P cash volatility has contracted and is ready to support a big move. The day following a contracted spread below 20 the market usually moves to a max level opposite to the true direction of the big move. Basically a stop run by the locals and specialists to get you on the wrong side.
Above chart is a 5-minute chart of trading 4-18-07 with most of the SR table values drawn in. Note the open dropped below the down test level, bounce back and failed to get back above the test level. Drops on down to within the usual plus or minus range of downmax. Note how the bounce off max stalled at short/go long then bounced around between long short. Next we saw a stall at up test then the old stop run toward the close that then closed below daily long.
Here are some trading tips to assist your learning experience:
What is "support"? Support means buyers come in seeing value at a certain level and begins buying in greater numbers than sellers. This turns the market around and a move up begins. Usually my support and resistance levels are hit within 1.5 points on daily and up to 3 points monthly. So let's say we open down to 1466 today, turn around and move back up to 1470, a normal reaction level. Market stalls here and trades sideways for some time, then drops again to1466. Once again buyers come in and turn it around. When this is seen by others they jump in also and drive prices higher than 1470. At the moment the first high is exceeded you can say "support" has held up the market. On the other hand say the price dropped below 1466 the second time and declines to 1461 before it turns around. The move up stalls at 1466 and turns back down. This begins to panic longs and they begin to sell also. This drives the market below the 1461. At that moment you can say the support level of 1466 has failed.
THE OPEN
If open prices drops to EXIT-LONG and turn up BUY EXIT-SHORT AND USE EXIT-LONG as a stop. Goal is the TEST at minimum. A strong move will achieve PIVOT indicating the trend is solid.
EXIT long approached from BELOW is a very important level. Once exceeded it clears the way for a move to at least LONG on average. Usually it depends on what level supported. If DN-PIVOT up pivot is usually the goal. If it stalls at EXIT long on the bounce back this is a sign the bears are still in control and look for lower prices and down MAXIMUM can easily be achieved. If open prices turn down from EXIT-SHORT SELL AT EXIT-LONG use EXIT-SHORT as a stop.
EXIT levels
These two levels are used as direction indicators at the open and during the day. Watch for these EXIT levels to act as triggers after fake out opening moves. Take the trade direction the second pass through an EXIT level.
Example: market opens down past EXIT long, stalls at SHORT. Buy slightly above EXIT long and use SHORT as a stop. Open moves are usually specialists or Market Makers taking advantage of public sentiment at the open. We often see the SP futures move 5 points on this open fake outs.
LONG & SHORT
Long and short act as support and resistance and they also indicate the trade direction that gives you the best low risk trade. When LONG is below the market you look for trades that are moving higher in price, same for SHORT. If the market finds support at SHORT buy it at EXIT-SHORT with EXIT-LONG as the stop. The goal is the UP-TEST level. If the market finds resistance at LONG sell it at EXIT-LONG with EXIT-SHORT as the stop. The goal is DOWN-TEST. Many times the first move up will stop at UP-PIVOT and find support at LONG. This gives you confidence to go long when prices break out from the support at LONG. Same for SHORT and DN-PIVOT.
TEST LEVEL
Weak markets will approach the UP-TEST level and stall. A failure at the test level usually gets you a move to the opposite test level. A fake out decline to DN-TEST will get you a move to at least UP-PIVOT for a day trade. This level will also support a strong trend market. For example the market is in a strong up trend and has stalled. A drop to the test level instead of LONG indicates great strength is still in the market. Look for it to achieve the Max level.
STRATEGY TRADING TIPS
1. (a) If open price drops to Exit Long/Go short and turns back up, buy it when it gets back above Exit Short/Go Long and use the former as your stop.
(b) If open price rallies to Exit Short/Go Long and turns back down, sell it when it gets below Exit Long/Go Short and use the former as your stop.
2. (a) Opens below short, wait for a rally to sell and use Exit Short/Go LONG, as your stop and reversal.
(b)Opens above LONG, wait for a pullback to buy, and use Exit Long/Go Short as your stop and reversal.
3. (a)Opens between Exit Short and LONG, wait for either rally above LONG or a break and sell below Exit LONG/Go Short.
(b)Opens between Exit Long and SHORT, wait for either a break below short or a rally and buy above Exit Short/Go Long.
4. Any time a market is below or above the Exits, it should never make it back through the opposite exit. This is a pretty powerful reversal and is one of the stronger trades you can make.
5. Trade against PIVOT first time there. If Pivot holds look for a two level move back to LONG/SHORT.
6. When a market penetrates a PIVOT, it will usually make it to MAXIMUM. So you might try to Buy or Sell a breakout of PIVOT.
7. Buy or Sell against MAXIMUM. Even strong markets tend to stop at this level.
8. One of the strongest trade signals there is, is when pivot holds, and then trades thru the opposite Exit.
EACH TRADING DAY. There are many of our members using the tables to trade the markets on a daily basis, if you do not have them you are trading at a disadvantage against others with this important information - we would under no circumstances be without them.
Larry Tomlinson
Market Charts Advisory
