Trading Gaps Types and Characteristics of Gaps

Knowing where the gap is located in the chart can quickly help identify what type of gap it is...

Gaps are a common occurrence in the markets. Everyday there is always at least one stock that has gapped up or down when the market opens. Why? As long there is some event happening somewhere between the market close of the previous day to the opening of today, there will be gaps. Even if the markets eventually move little by little toward the inevitable 2 !hour format, there will always be gaps. After all, somewhere around the world, there is some event happening during the weekends as well. "lus, there is always an e#cited group of investors who making a big deal out of something or even for no reason unknown to the rest of us. $o, gaps are a fact of life and there is no avoiding it. %he best thing is to take it in stride and learn how to profit from it.

%here are three different types of gaps& 'reakaway, (unaway and E#haustion gaps. Each of these gaps appear at a different cycles of the markets.

'reakaway gaps occur when a stock has been in a consolidation stage) instead of a normal market!session move, it breaks out with an opening gap. *ormally, these gap in the same direction before to the consolidation stage. %here is one caveat& when the breakout happens, it can be in either direction. %his gap is trickier than the others because the intent of direction is unclear.

+n the chart e#ample above, the market was going through a correction. When it finally finished consolidating ,a symmetrical triangle pattern-, it broke out with a gap to the upside to end the correction period.

As for (unaway gaps appear when the stock has been trending for some time. +nstead of a normal move up during market hours, they open with a gap in continuation of the dominant trend. +t shows there is more interest in the stock, possibly by some positive news to further boost the investors eagerness to own it. (unaway gaps are also called .easuring gaps because they are often used as a centering point of measurement from the beginning of the trend to the gap, then from the other side of the gap to measure the ne#t likely level where it would reach.

%he chart below shows the prevailing trend, moving steadily upward. Along comes the opening gap, pushing in the same direction higher, not even a moments pause or pullback until much later in the trend.

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'elow is the e#ample of how a (unaway gap is also used as a .easuring tool. When the gap has been identified, the measurement is taken from the beginning of the trend ,/0.12- up to the bottom of the gap ,23.42-. 5rom that distance, it is used to measure how far the prices will likely to continue. $o the measured target starts at the upper part of the gap ,042./ - to the e#pected level above it. +n this e#ample, the target was 064.23. %his is a very powerful and easy!to!apply concept which can be used to find profitable trades.

%he last type of gaps is the E#haustion gaps. %hese occur when the market has been trending for a long period of time, normally after a bull market or bear market that as been lasting for a few years. When it appears, there is a period of slowing of the trend slowing, or period of consolidation. %hey usually appear near tops or consolidation areas after strong trends. .any times, the E#haustion and 'reakaway gaps are mistaken for one another. 7epending on the location and whether or not it was an up gap or a down gap. %he E#haustion gap is an up gap appearing in the market tops, and a down gap in market bottoms. As for the 'reakaway gaps, they are up gaps in market bottoms ,and from consolidations- and down gaps on market tops ,and from consolidations-.

'elow is e#ample of each to better identify the difference. %he market has been forming what look like a top, with the symmetrical triangle consolidation. %riangles are usually trend continuation patterns, but as the chart shows, the gap was break away from the pattern to the downside. %his is a breakaway gap. After that gap, 89:: attempted to push prices up again with an up gap. %he prices gapped up to a new high, then turned around immediately the same day. %hen the ne#t following days, the prices filled the gap, confirming that the previous gap and the direction of the market ,now downtrendare real. %he E#haustion gap was at last identified as such when considering the surrounding price action. %he action created an island reversal.

%he e#ample below is the e#haustion gap ,down- at market bottom. %he market has been trending down with determination. 5inally, a blow!off came with a big gap down, but there were no more selling. %he ne#t few days show the market stabili;ing, even some buying. 5inally, more buying pushed the market higher, ending the market bottom.

<nowing where the gap is located in the chart can =uickly help identify what type of gap it is. %hese gaps give clues to the strength or weakness of the stock since they are usually turning points in the market direction. "aying e#tra attention to them can provide uni=ue opportunities to trade with the right trend ,or reversals- and profit from them. %he ne#t article will discuss the tactics in entering and e#iting in trading these gaps.

Tradin Stocks "ducation - Tradin tactics & exa!ples

Trading Gaps - Part 2

#hile there are !any strate ies involvin

aps, let$s look at a few here.

%s a rule we like to buy stren th and sell or sell short weakness. This is the preferred play. There is an exception however. &elow is an exa!ple of shortin a stron stock.

chart courtesy of Mastertrader.com

The nicest plays are where a stock ets extended and then aps in resistance 'for a short(. )owever, there are ti!es a stock !ay not have a resistance area, like when at new recent hi hs. #hy short a stron stock? #ell, nor!ally we would not. &ut this stock is over extended. *ook at the +,-period !ovin avera e 'red(. -otice how far away we are now as co!pared to in the past two !onths. -otice that there were six days up in a row, all of the! since the breakout fro! the base, or consolidation area on the daily chart. *ook at the increasin volu!e as shown by the last three reen bars on the daily chart. -ow, on the last day shown, the stock aps up. That is the key. This is known as a Novice Gap. The lateco!ers are decidin that now is the ti!e to buy. This is where the opportunity is, on a day like this on the ap up. This is a uerrilla type tactic that should be used for the day, or possibly one overni ht.

Super Diver ence !lueprint - *earn how to discover $hidden$ !arket !oves. There are points in any !arket 'stocks, forex, futures( where a "diver ence pattern" occurs that could tri er a potentially hu e !arket !ove that !ost trend-followin !ethods would otherwise !iss? Super Diver ence !lueprint by #rofits$un reveals how you can discover %idden Trades with astonishin si!plicity. &lic' To Get More Info!

&elow is another exa!ple on a lon play.

chart courtesy of Mastertrader.com

)ere a ain, look at the distance fro! the +,-period !ovin avera e. There are five days down in a row. .ne thin !issin here is the bi increase in volu!e on the last day. )owever, look at the si/e of the ap. This is a lar e ap after five days down. )ere is a sli htly different play shown below in 0%-%1.

chart courtesy of Mastertrader.com

-otice all the sa!e thin s here. The distance fro! the +,-period !ovin avera e, the nu!ber of days up, and the increasin volu!e are all present. )ere, the stock does not ap up in a novice fashion, but rather it aps down '2, cents(. This is known as a #rofessional Gap. Profit takin sets in and the stock drops. This stock opened on its hi h of the day. #e shorted this stock at +3.4, with a stop at the hi h of the day, 56 cents away. #e took half profits at our first tar et +7.+8 and are trail stoppin what will hopefully be a swin trade.

There are two nice thin s about playin aps that !any traders like. 9ou can usually have very ti ht stops, 'or can pass on the ones where you do not(, and you usually et so!e results fairly :uickly. .ften reversal ti!e '5,;,, %.<.( brin s so!e results.

Trading Gaps - Part 3

Tradin Stocks "ducation - Tradin tactics & exa!ples

=ap >eversals These !ethods work best for a two or !ore day trade, known as a position trade. This !ethod see!s to work best on -%S1%? stocks. @n trendin !arkets, it has an excellent accuracy rate of !ore than 3,A.

!ullis( Gap $eversal Guidelines or $e)uirements

0. 2. 6. . >. A stock that has a consistent trading range of at lease 0.3> points. $tocks that have a decent spread. Although a stock is often entered with an E?*, a trader does not want to be severely hurt by the spread. $tocks should also have an ade=uate number of market makers to allow for cushion. %he stock should be down at least two days in a row before it becomes a consideration. :pen of the current day .@$% be in the top 2>A of the dayBs price range. ?lose of the current day .@$% be in the bottom 2>A of the dayBs price range.

#ith *isualTrader, you will know when the !arket is turnin , which industry roups are leadin the sta!pede, and which charts have the best setups. +mniTrader ives you the power to !ake decisions fastB @t ives you real tradin si nals with all of the supportin infor!ation auto!atically displayed for you.

Ne,t tradin day-s .&TI+N

0. 2. 6. +f the stock gaps open to the downside and then begins to rally back, buy it at 0C2 to 0C above the previous dayBs low. +f a trader misses that entry, buy when it trades above its first one!half hour high. .arket makers should be buying the stock as well. $topCloss should be 0C2 to 0C below the current dayBs low. Dook closely at the chart to determine an average and reasonable profit amount, or decide on a dollar amount that is reasonable for the stock and get out at that point. +f the market andCor sector remain strong, a trader is in very positive territory and should hold it for the ne#t day or two.

!earis( Gap $eversal Guideline $e)uirements

0. 2. 6. . >. A stock that has a consistent trading range of at lease 0.3> points. $tocks that have a decent spread. Although a stock is often entered with an E?*, a trader does not want to be severely hurt by the spread. $tocks should also have an ade=uate number of market makers to allow for cushion. %he stock should be up at least two days in a row before it becomes a consideration. :pen of the current day .@$% be in the low 2>A of the dayBs price range. ?lose of the current day .@$% be in the top 2>A of the dayBs price range.

Ne,t tradin day-s .&TI+N

0. 2. 6. +f the stock gaps open to the upside and then begins to fall back, sell it short at 0C2 to 0C below the previous dayBs high. +f a trader misses that entry, sell it short when it trades below its first one!half hour low. .arket makers should be selling the stock as well. $topCloss should be 0C2 to 0C above the current dayBs high. Dook closely at the chart to determine an average and reasonable profit amount, or decide on a dollar amount that is reasonable for the stock and get out at that point. +f the market andCor sector remain weak, a trader is in very positive territory and should hold it for the ne#t day or two.

Types and &(aracteristics of Gaps

Trading Gaps - Part 4

Tradin Stocks "ducation - Tradin tactics & exa!ples

Mornin Star Gap $eversal Guideline $e)uirements

0. 2. 6. . >. /. A stock that has a consistent trading range of at lease 0.3> points. $tocks that have a decent spread. Although a stock is often entered with an E?*, a trader does not want to be severely hurt by the spread. $tocks should also have an ade=uate number of market makers to allow for cushion. %he stock should be down at least two days in a row before it becomes a consideration. :pen of the current day .@$% be in the top 2>A of the dayBs price range. ?lose of the current day .@$% be in the bottom 2>A of the dayBs price range. Above average volume on the current day is preferable.

Ne,t tradin day-s .&TI+N

0. 2. 6. +f the stock gaps up on the open ,at least 0C2 point to one point- above yesterdayEs closing price, buy it immediately. +f a trader misses that entry, buy when it trades above its first one!half hour high. .arket makers should be buying the stock as well. $topCloss should be 0C2 to 0C below yesterdayEs low. Dook closely at the chart to determine an average and reasonable profit amount, or decide on a dollar amount that is reasonable for the stock and get out at that point. +f the market and or sector remain strong and a trader is in very positive territory, the trader should hold it for the ne#t day or two.

Super Diver ence !lueprint - *earn how to discover $hidden$ !arket !oves. There are points in any !arket 'stocks, forex, futures( where a "diver ence pattern" occurs that could tri er a potentially hu e !arket !ove that !ost trend-followin !ethods would otherwise !iss? Super Diver ence !lueprint by #rofits$un reveals how you can discover %idden Trades with astonishin si!plicity. &lic' To Get More Info!

/venin Star Gap $eversal Guideline $e)uirements

0. A stock that has a consistent trading range of at lease 0.3> points.

2. 6. . >. /.

$tocks that have a decent spread. Although a stock is often entered with an E?*, a trader does not want to be severely hurt by the spread. $tocks should also have an ade=uate number of market makers to allow for cushion. %he stock should be up at least two days in a row before it becomes a consideration. :pen of the current day .@$% be in the low 2>A of the dayBs price range. ?lose of the current day .@$% be in the top 2>A of the dayBs price range. Above average volume on the current day.

Ne,t tradin day-s .&TI+N

0. 2. 6. +f the stock gaps down at the open ,at least 0C2 point to one point- below yesterdayEs closing price, sell it short immediately. +f a trader misses that entry, sell it short when it trades below its first onehalf hour low. .arket makers should be selling the stock as well. $topCloss should be 0C2 to 0C above yesterdayEs high. Dook closely at the chart to determine an average and reasonable profit amount, or decide on a dollar amount that is reasonable for the stock and get out at that point. +f the market andCor sector remain weak, a trader is in very positive territory and should hold it for the ne#t day or two.

0indows 1Gaps2
#indows as they are called in Capanese Dandlestick Dhartin , or =aps, as they are called in the west, are an i!portant concept in technical analysis. #henever, there is a ap 'current open is not the sa!e as prior closin price(, that !eans that no price and no volu!e transacted hands between the ap.

% Gap 3p occurs when the open of 1ay + is reater than the close of 1ay 5. Dontrastly, a Gap Down occurs when the open of 1ay + is less than the close of 1ay 5. There is !uch psycholo y behind aps. =aps can act as; $esistance; .nce price aps downward, the ap can act as lon -ter! or even per!anent resistance. Support; #hen prices ap upwards, the ap can act as support to prices in the future, either lon -ter! or per!anently.

Windows Example - Gaps as Support & Resistance

The chart below of e&ay '"&%9( stock shows the ap up actin as support for prices.

.ften after a ap, prices will do what is referred to as "fill t(e ap". This occurs :uite often. Think of a ap as a hole in the price chart that needs to be filled back in. %nother co!!on occurance with aps is that once aps are filled, the ap tends to reverse direction and continue its way in the direction of the ap 'for exa!ple, in the chart above of e&ay, back upwards(. The exa!ple of e&ay '"&%9( above shows the ap actin as support. Traders and investors see anythin below the ap as an area of no return, after all, there was probably so!e positive news that sparked the ap up and is still in play for the co!pany. The chart below of #al-<art '#<T( stock shows !any instances of aps up and aps down. -otice how aps down act as areas of resistance and aps up as areas of support;

=aps are i!portant areas on a chart that can help a technical analysis trader better find areas of support or resistance. For !ore infor!ation on how support and resistance work and how they can be used for tradin , 'see; Support & >esistance(. %lso, =aps are an i!portant part of !ost Dandlestick Dhartin patternsE 'see; Dandlestick &asics( for a list of candlestick pattern charts and descriptions. That is a lot of data to take in but @ will try to hi hli ht so!e of the !ore relevant ite!s. The first interestin fact is that the A upFdown over the past 5, years has been relatively stable with the 5,yr. av bein 64A up versus 42A down. "ven the hu e rally since early +,,G did not cause the ap data to chan e very !uch. #hat has chan ed over the past few years is the si/e of the =aps H look at the +,,5-+,,2 data versus the +,,7-+,5, data H lar er aps are !uch !ore fre:uent lately. This is why in part @ thou ht that this blo would be so!ewhat ti!ely and relevant. The last chart analy/es the =aps to see if they fill prior to the !arket close. 9ou can look at the historic data yourselves, but what @ wanted to point out in this blo is the +,5, data. For down =aps less than I,.6, in the SP9 look at that data H G4A fill rate. That is about as close as you can et to a uarantee. )elicopter &en and the Federal >eserve &oard have !ade s!allish down =aps al!ost free !oney. The last thin @ will point out for +,5, is the Jp =ap data for =aps I,.76 and lar er H look at how the fill rate dropped in +,5,. Talk about =ap and =oBB #e should all thank Jncle &enB Stoc' /,amples4 For the re!ainder of this blo @ thou ht @ would show so!e exa!ples of how @ look at stocks that !ake lar e pre-!arket aps. "ach of the three illustrate different aspects so @ thou ht they should all be included.

Do!!on to all of these exa!ples is how @ prepare for the !arket open. @ like to have !y 6!in chart set to show the pre-!arket tradin fro! 3a! so @ can draw hori/ontal lines at the hi hFlow pre-!arket prices. This is the ran e that @ watch to see how the !arket trades after the nor!al hours open. #ill the stock break the pre-!arket ran e hi hs?? @f not then you can expect so!e down side testin . S#5 )istorically any ap hi her than about I,.7, indicates a real possibility for a =%P and =o start to the day. Today we saw a I,.G2 =ap. )ere is the SP9 6-!in chart;

%fter drawin the pre-!arket ran e into the chart we let the !arket open up to see what will happen. The pre-!arket ran e is pretty ti ht I5+2.73-I5+2.2+ H this ti ht of a ran e with the si/e of ap 'I,.G2( !akes !e lean to o lon on the break hi her of the pre-!arket ran e or the hi h of the first 6-!in candle. This happened on the 8rd candle. The key is to buy a core position for Trend 1ays and then trade around that position. Sell your tradin position on extre!es and buy on pullbacks. For extre!es @ like to watch !y >S@'+( 6-!in chart and @ look to sell when that readin is K G,A. .n pullbacks, @ look for the 5!in-stochastic to et oversold 'i.e., L or around +6(. @ circled in reen two of the !ore obvious pullbacks. .n Trend 1ays it is also very nor!al to buy any pullbacks into the +,e!a H this never really happened until the purple circled area. The thin to note was that before this pull-back, the SP9 failed to !ake a new hi h on its 5+;56p! eastern push. That is al!ost to be expected since trends often pause durin the nor!al lunch hour break '5+-5;8,p!ish(. #hat this lower hi h should do however is warn you to not auto!atically buy the retrace!ent into the +,e!a H be a bit suspect. That would have indeed saved you so!e !oney here in the SP9 as it chopped lower over the lunch hour and then finally broke the Mline in the sandN that !ost professional intraday traders

utili/e H the 6,e!a on the 6!in chart. The SP9 !ade a bear fla kind of rally into the closin ti!e period so @ a! expectin so!e weakness at least first thin to!orrow. This blo is ettin too lon so @ will be brief on the last two exa!ples; 6&74 The FDO chart is sli htly different than the SP9 early on 'click on the chart to enlar e(.

9ou can see that FDO had trouble at its pre-!arket hi h levels once the !arket opened. The first push throu h that line ca!e at G;66a!. The fact that it took +6!in was your first warnin that it was not likely to o shootin strai ht up. @n fact the first candle to break this level actually closed back below the !arker line. The s!artest thin to do is to see how FDO does when it tests the lower end of its K G;8,p! price ran e. Price pulled into the +,e!a 'red circle( and the >S@'+( si naled to try and o lon here and that is what @ did. The 6!in chart ot over bou ht at the upper bollin er and was confir!ed by the >S@'+( ' reen circle(. This is where @ sold. 8*S4 The last exa!ple is *PS H *PS had the bi est pre-!arket bounce of the three exa!ples. @t apped open +.36A versus .72A for the SP9 and 5.8A for FDO. This should be a warnin si nal for you 'click on chart to enlar e(.

9ou can see in the chart that the !arket opened up and *PS :uickly shot above the pre!arket ran e, but the absolute level of the !ove should have caused so!e caution. The first couple of candles showed upper le s which a ain should have raised your antenna. % ressive traders could have started tryin to short *PS here with the ).1 as their out. @ hate shortin stocks at the start of a potential Trend 1ay H in !y opinion there is no :uicker way to lose !oney. %s @ !entioned thou h, *PS was really stretched so @ can see the rationale here in this case. <ore typical areas to short would have been the hi h or low pre!arket ran e boundaries with the stop Qust above the ).1. %s !any of !y readers know, when shortin a stock @ try to find an opti!al ti!eFprice spot to short. @ was not involved in *PS today but to !e that spot would be after the first real bounce that *PS had which actually put in a lower hi h H that was at around 55;8,a! eastern 'red circle(. This area was also ri ht near the pivot point at I47.+2 and the open price of I47.+2. The break of the 6,e!a confir!ed the bearish nature of the *PS chart today. @R! sorry @ !issed *PS today as this chart was pretty text book. &onclusion4 @ hope people learned a little bit about the stats behind SP9 aps. %lso, @ think all three of !y exa!ples showed different strate ies for tryin to trade, a strai ht ap and o 'SP9(, a retrace!ent into the +,e!a 'FDO(, and a failed break hi her '*PS(.

3tili9in Support and $esistance 8evels : #art ; %pplyin basic price levels to identify support and resistance levels.
1ece!ber 2, +,,7 OK gang... let's let going... First of all... thanks for coming! This is the first of a 4-part lecture series on support and resistance. For those of you who have purchased my ! series" the material in this series is going to #e a #it of refresher. $t will cover some of the main points in the %&' segment of that course" #ut $ have completely

new charts" etc." so it will help possi#ly clarify some of the points as well. $ will take (uestions following the class" so please hold off until then since often $ find that many of the (uestions people have mid-way end up answered #y the time $ am done anyway. )* %imply put" support and resistance levels are places in the market when the current trend or price move that is in play in the market will either turn or stall. The traits of support and resistance levels apply to all type of markets and time frames" so the concepts in this class will figure into any market you trade. +ow" when thinking of support and resistance levels" it is very common for most people to think of them in terms of a#solute price levels. For instance" if they are looking at ,-. as a resistance levels" they mean e/actly ,-.. On the other hand" if they are looking at moving averages as a support level" they will check to see what the e/act price of the moving average is" such as ,-..01. $n reality" support and resistance levels are not e/act prices" #ut rather price 2ones. %o" if the resistance level is ,-." then it is actually the 2one around that ,-. level that is the resistance. The stock may hit only ,43.10 or it may hit ,-..4- and still hold the ,-. as price resistance. The main factor in determining e/actly how much the e/act prices are tested #y is how (uickly or slowly the prices move into that resistance 2one. For instance" if the 2one hits very (uickly on a large momentum surge" then it is more likely to hit that ,-..4- level. This is also the case if the stock is a rather volatile one with a wide price range intraday. $f the security spikes higher and does not (uite hit the price resistance" such as a spike into ,43.0." then it may round off into ,-. with slightly higher highs and never e/actly touch the ,-. price resistance 2one #efore turning over due to the slowdown in momentum into that resistance. The larger the time frame" the greater the price 2one is as well. 5 resistance 2one at ,-. on a weekly time frame may have a range of ,6 on each side of ,-.. 7here traders tend to run into trou#le is in thinking that #ecause the stock has traded over ,-. #y more than 8ust 6. cents that the ,-. has #roken" so we often hear of people 9#uying the highs9 or 9shorting the lows9 in the case of support. For today's session $ am going to focus on 4 main types of price support and resistance. They are 7:O;< +=>?<' %=@@O'T 5+! '<%$%T5+ <" @'$ < @$AOT%" @'$ < O+B<%T$O+ CO+<%" and <D=5; O' ><5%='<! >OA<%. $ will #egin with the whole num#er support&resistance Es&r*. 7hole num#er support and resistance refers to the price levels most of us have in our head when we think of support and resistance right away. They are levels like the 64"... that we have heard so much talk of in recent months. +? does not get e/cited #y the !ow hitting 6F"314. 7e do not hear a#out oil in terms of the cents per #arrel" #ut rather it's pro/imity to #reaking the whole num#er level. 7hen a security" or the market overall moves into these larger price levels" rounded to either the dollar in most stocks" or the 6.s" 6.." etc. people tend to react most often at those levels. $t's second nature. >y third grader has 8ust spent her first semester in school learning how to average and to round up or down. That is then taken with us throughout our lives.

F$B='< 6 - ,!G$ !aily

For futures traders a common level we will notice in the +D is how that tends to gravitate to moves of - points at a time and stall at or a#out the - point increments. $n the H> the 6. point increments" and particularly the 6.. point levels catch people's attention and reversals or consolidations tend to form at those 2ones. $n the chart of the !ow Gones $nd. 5verage EFigure 6* we can see how it often moves towards those 6.. point increments as well. The 64"... and 64"... level are the most pronounced in this case" #ut many of the places it stalls at are almost e/actly at a 6.. point price level. <ven though at 9!9 the !ow technically #roke 64"... in terms of the e/act price Eyet held the 64"4.. securely* when we think of the !ow in terms of a larger time frame move" we have yet to see the 64"... 2one penetrated. 5t 64"4.." the !ow was %T$;; 5T the 64"... price resistance 2one. 7hat $ am looking for at this point is a third test of that 2one" may#e even a slightly higher high and then a larger correction where we can see a stronger reaction to this price resistance 2one on a larger time frame. F$B='< 4 - G?;= !aily

:ere is another e/ample of price support and resistance EFigure 4*. This time it is in a rather cheaply-priced stock that $'m sure you've all heard of... G?;= EGet?lue 5irways*. 5t times" the support or resistance 2ones will appear to #reak" pushing through the s&r level only to swing #ack and hug that level. This was the case in >arch and early 5pril in G?;=. G?;= had fallen into ,64 on rapid momentum" pushing it somewhat under the e/act price support of ,64. $t then hugged that level for over a month #efore giving way to another round of selling into the ,6. support 2one. Once again the momentum was strong" so it traded slightly under that e/act price #efore pulling highs. 7hen it tested it the second time around" however" in the middle of Gune" it held that price more precisely since the momentum at that point was not as steep. This second test of ,6. was then followed #y a retracement #ack into the ,64 level. Once a support 2one #reaks" such as the ,64 level in G?;=" that 2one then #ecomes resistance on a reversal. F$B='< F - @!;$ !aily

:ere is another e/ample that you can look at which shows similar types of price activity EFigure F*. +otice that the rapid move into +ovem#er with one #ar of selling pushed through the ,61 e/act price level that first day it it" however" it then sprung #ack and coiled along that price support 2one. >any times this would present itself with a drop into something such as ,60.14 and then the ne/t test of the ,61 support within the coil would hit ,60.3I" followed #y a third move which tests the ,61 e/actly and holds" often forming a smaller congestion #ase at that e/act price #efore #reaking on that third test. Today @!;$ reversed #ack into that price level and hence it served as resistance. The highs of the day were ,61.64 with a closing price of ,60.10. ?oth were well within the ,61 price resistance 92one.9 The second type of price support&resistance that $ wish to cover is closely tied to the first. $t deals with retests of previous pivot highs or lows. 5 9pivot9 is simply a level where prices reverse. Hou can usually identify them #y the 9A9 or upside down 9A9 that they form. Hou may not see them unless you drop down to smaller time frames if the security is in a congestion. %ometimes these price pivots correspond to whole num#er s&r" sometimes they do not. F$B='< 4 - ,!G$ !aily

$n this e/ample of the !ow" it does correspond to the whole num#er support&resistance levels EFigure 4*. 7e are looking first at the 64"... level. This hit in Guly for the first time and then retraced #ack into the prices from the first (uarter. 7hen the !ow hit the 64"... 2one for the second time" it was actually at the end of %eptem#er that this took place" coming off a sharp rally mid-month. The 92one9 of the 64"... high was where all the price #ars overlapped at the initial 64"... highs. The stronger upside momentum on the second test of the 64"... resistance level allowed the !ow to push somewhat past the e/act high to form a slightly higher high #efore the momentum reversed and led the inde/ #ack into the previous lows. The 5ugust lows were made on e/treme downside momentum. %ince the pace was slower into +ovem#er on that second retracement off the 64"... highs" it did not (uite hit the e/act lows from 5ugust" #ut only came into the support 92one9 of those lows. F$B='< - - G?;= !aily

5nother e/ample was the ,6. level $ had mentioned earlier in G?;= EFigure -*. Hou can see that while ,6. hit and held on the first day into that level in 5pril. $t then rolled over a #it off the lows" like the !ow did off the second highs" and made somewhat lower lows. $t did not (uite hit that ,6. support the second time around" although it did retest the 92one9 of that support in Gune. 7hole num#er support&resistance can also #e tied into the third type of price support&resistance) congestion 2ones. 7hen a security falls into a trading range" congestion 2one" #ase" coil" or whatever you wish to call it" that 2one #ecomes s&r on any retracement once it has #roken. 5 #reakout to the upside from a trading range will mean that the range itself #ecomes support on any retest of it. These trading ranges often take place around whole num#ers. F$B='< I - ,!G$ !aily

5s in the other types of s&r" the stronger the congestion is retested" the more the security can penetrate that s&r 2one. 5 more shallow move into the congestion after it #reaks lower and is moving higher" such as in 959 in Figure I" can mean that the lower end of the range tests and holds first like it did a few weeks #efore 959. 5 stronger move" such as into 969 on a pull#ack off highs on an upside #reakout" can lead it to testing the lower end of the channel #efore it sees much reaction. $n J4 it also pulls into the lower half of the earlier congestion" which also corresponds to the 6F"4.. whole num#er support and the pivot high in 9?9. $n this case" J4 has all three types of price support we have covered thus far interacting at the same time" making it a very su#stantial support level! F$B='< 0 - G?;= !aily

5nother e/ample of this type of s&r also took place on the chart of G?;= EFigure 0*. +ot only was the Guly test of ,64 a return to the whole num#er as price resistance" #ut it was also resistance from that earlier congestion level. F$B='< 1 - @!;$ !aily

@!;$ has two e/amples EFigure 1*. The first is a larger congestion #ack in %eptem#er and the second is 8ust a three day congestion in mid-Octo#er. %ince the price drop into the larger congestion was very rapid" it pulled to the lower end of it in the second

half of Oct." while the smaller congestion served as resistance on the #ounce off the Oct. lows. The final type of price support or resistance that $ will show you today is an e(ual or measured move. Hou can call them whichever you wish )* This concept is rooted in momentum as well. <ssentially" if a price move is followed #y a congestion" such as a #ase" flag" etc." then as long as the congestion #reaks at a#out the same momentum as the move into it" it will have the strong potential to hit an e(ual move level on that continuation. F$B='< 3 - G?;= !aily

G?;= has two such e/amples on this daily chart EFigure 3*. O#viously you can com#ine this with the other types of s&r to help esta#lish targets" even if something is at new all-time highs! F$B='< 6. - @!;$ !aily

@!;$ EFigure 6.* also had this take place when the correction off the Oct. lows gave way and the new congestion 2one into +ovem#er #roke lower at the same rate of selling as it had seen heading into that congestion level. $t was una#le to mimic the move for a third time" however" due to a much more su#stantial support level from the lows in 4..I. This was the first time that larger support 2one had #een retested" so it was una#le to easily #reak through it. %maller time frame support or resistance levels will always #e easier to #ust than those on a larger time frame" even though the 2ones on the larger time frames will #e wider. 5t the same time" support or resistance levels which have most of these types of support or resistance hitting at a#out the same time will also #e stronger than if only one of these 4 hits at any given time. %ince the prices of each will not tend to line up e/actly" this is another reason you must consider them to #e CO+<% and +OT <K5 T @'$ <%!!!!

3tili9in Support and $esistance 8evels : #art <

Applying trend lines and channel analysis to identify support and resistance levels. 1ece!ber +,, +,,7 For those of you who could not !ake it to the last class, the link for the lo s is as follows; http;FFwww.tradin fro!!ainstreet.co!FclassesFDlassSS>Part5.ht!l Today$s topic is an expansion upon the previous se !ent where @ introduced you to the basics of support and resistance levels. @n the last class @ talked about the various types of price support and resistance. These included whole nu!bers, previous hi hs and lows, con estion /ones, and e:ual !ove or !easured !ove levels. =ap /ones also fall into this cate ory. Today$s topic deals with a !ore difficult type of supportFresistance level to identify; trend

lines and trend channels, as well as how to use the! in your tradin . @ will be in with a very brief review of what exactly supportFresistance levels are and how to approach the!. Support refers to prices under current levels, while resistance refers to prices above. "ssentially, they are price areas where a security is likely to have so!e sort of reaction to that price area. The key word here is Tarea,T or T/oneT is another word that could be used. SupportFresistance levels are -.T exact prices, even if you !ay think they should beB "ven I5,, is not an exact resistance price if a security is !ovin hi her into it. >ather, it is the /one around that price, which can be wide if the volatility is hi h and !o!entu! is stron headin into it, or can be rather narrow if volu!e is low and the !o!entu! or pace of a !ove into the resistance is radual. Fro! last week you !ay recall that we looked at a specific type of price supportFresistance whereby we looked at previous hi hs and lows as supportFresistance levels. Today$s class builds upon that concept. % :uick review of it is shown with this exa!ple in Fi ure 5 of the "S fro! the last couple of tradin days. The "S has been in what is called a Ttradin ran eT or Tcon estion /oneT durin the past 4 sessions. This !eans that !ost of the prices fell within a iven price ran e. .n the 57th, the day be an with a narrow ran e. U4 and U6 !arked the lower end of that ran e. U4 was support, which held when tested a second ti!e. F$B='< 6 - <% 6- >$+=T<

The third test of a support or resistance level is often the one !ost likely to break. The "S did so early on in the afternoon. .nce support breaks, when it$s tested a ain, such as at 1 and then ", it beco!es resistance. This concept is repeated on a lar er scale with %, &, and D as hi hs and 5, +, and 8 as lows. @f you were watchin the !arket into the close, you will notice that the "S tested that upper channel resistance a ain afterhours, !akin this the third test after the !ove hi her fro! !id-day on the 53th. 'Jpdate; @t then broke hi her later in afterhours tradin and openin with a si nificant upside ap into the next session.(

The idea of trend lines and trend channels takes the #asic idea of previous highs and lows as support&resistance levels and turns it on edge. %o" instead of the sideways trading range with o#vious highs and lows" we now are #eginning to look at other types of trends using the same principals. The sideways trend is 8ust one of the three ma8or trends in a market. 5 trend is simply the direction of price movement. 5n uptrend is a series of higher highs" while a downtrend is a series of lower lows. The sideways trend is more of a choppy range with highs and lows at compara#le levels" although often they will favor one end of that range over the other" much as they did o the morning of the 60th in the <% in the first e/ample" where they favored the lows. F$B='< 4 - =@T'<+! :5++<;

Figure 4 displays a typical uptrend. The #lue lines connecting the high points and the low points are the trend lines. om#ined" they make up the trend channel. +ow" to form a trend line" you simply need two points of reference to go off of. $n the sideways trend we only needed one) the previous high or low. $n a directional trend" such as an uptrend" we need two highs with the second higher than the first. $n this image those points are 5 and ?. ?efore any lows following ? are even made" we can go ahead and connect those two upper price levels and e/tend the line connecting them outwards. This #ecomes the trend line resistance levels. 5s it is tested on a su#se(uent move higher" the 2one around that line serves as a level where prices are likely to react in some manner to that resistance 2one.

Keep in mind what we talked a#out last time) The faster a resistance level hits" the more 9give9 it has to it. %o" if the momentum off the low from J4 is faster than off the low from J6" then it can push through that upper trend line's e/act price level a #it more #efore #ouncing #ack in. 7hen the prices in this chart returned to the lower channel at JF" they did not make it #ack to the upper level again. $nstead they only moved up a#out halfway or a #it more #efore dropping through the lower trend channel. +ow" at this point" that lower trend channel support has #roken and #ecomes resistance on any move or push higher. This is the case of where it is tested in !. $f you miss out on the first or even second entry trigger when playing reversal patterns" then 9!9 #ecomes a good level to pick up a short position. Often $ do not even wait for a smaller trend channel to form and #reak" #ut will enter the short as soon as $ see any stalling within that move into !. F$B='< F - '$>> -. T$ K

O#viously" as with any tool for reading the market" the support and resistance 2ones are 8ust one factor in a larger picture. Figure F shows a great e/ample from this afternoon where the trend channel support&resistance action in play. The initial trend channel can #e drawn #y connecting 5 to ? and then e/tending that line downward and then connecting 6 to 4 and doing the same. +otice that the selling increased with each downside move. This pushed the prices into that lower trend channel more than if the prices had declined at a similar rate as #efore. :ence" the support had more 9give9 to it. 5fter #ouncing #ack" the channel held again at !" forming a smaller and slower drop around 6-)4. <T. The door was

now open for a confirmation of the trend change. F$B='< 4 - '$>> -. T$ K

5nother e/ample soon followed in Figure 4. 7hat $ want you to pay attention to here is that when '$>> tested the upper trend channel at " it did not immediately pull #ack off that level. 5lthough earlier it had pulled off it gradually in ! in Figure F" this time it hugged it. ?oth of these are variations on the same thing) momentum change. ?y hugging the resistance level or pulling off it very slowly" it creates the scenario for that resistance level to #reak. +ow" in this second e/ample it attempted to do so too (uickly" and hence congested longer" however the theory is still the same. 5nother e/ample of the channels is found in BOOB from today in Figure -. The channeling action in BOOB was a primary contri#utor to it #eing the main focus of my attention this afternoon. $n BOOB we had a series of channels forming and #reaking" each more #ullish than the ne/t. F$B='< - - BOOB -. T$ K

The first channel #egan right away out of the open. $t was a slow downtrend into 6.).. <T. BOOB did not hit the e/act price of the upper trend line at ?" #ut it did come into that price 2one. $t then did not make it #ack to the lower end of the channel" instead stalling a#out halfway to where the lower channel line would #e and rounded off. The stock returned to the upper channel" #ut again only held it a few minutes #efore #reaking through. This trend #reak alone was not enough on the larger time frames to yet sustain an upside move. 5s the day progressed" however" the channel did as well. 5s a channel develops" the last segment of the channel often gains importance over the first. %o" the result is that $ am often changing my trend line to adapt. !rawing trend lines is more of an art than an e/act science" which endlessly frustrates those traders trying to devise programs to display them automatically. Often $ leave out e/treme ticks when $ am looking at a trend line" or $ pay the greatest regard to the #odies of a candlestick chart and look for my trends to closely associate with them. F$B='< I - BOOB -. T$ K

Figure I shows the progression of the trend channel out of the open in BOOB. 9?9 had not (uite touched the upper channel line" so $ drew a new one to pro8ect out the upcoming support levels. +otice that the move into 6.)6- <T corresponded to the previous low" which is another ma8or type of support level. Of course the time of the day also factors in. $n terms of the channel" however" that resistance from the trend channel on the upper end of it" when e/tended" (uickly #ecame the support only 6minutes after it had #roken. F$B='< 0 - BOOB 6 >$+=T<

Figure 0 takes this channel out further and looks at the larger channel of the formation this morning. J6 is the support level we were 8ust looking at. $t held and a higher high was made" #ut still under the initial morning lows. ?y pulling #ack again into 66).. <T" it formed a second low to create a symmetrical triangle. 5t that point" once the prices #egan to move higher at a#out 66)6- <T" the highs from 5 and ? could #e linked and e/tended" as could the lows from 6 and 4. +otice that as BOOB moved higher into 66)F. <T" when it hit that upper channel" it hugged it throughout the ma8ority of that mid-day correction into noon off that high. This continued to develop the #ullish #ias in the stock into the early afternoon. 5gain" when looking at the last segment of that trend channel" it #ecame support once #roken over noon" holding on lows around 64)F. <T and into 6F).. <T. This can #e seen in Figure 1. F$B='< 1 - BOOB 6 >$+=T<

7ith each pull#ack into the afternoon" the trend channel shifted. The first drop in the morning was the strongest" followed #y a symmetrical triangle and then an ascending triangle" which is displayed #elow in Figure 3. 5t 9!9" BOOB had pulled up through the upper channel line. $t is the pull#ack off that channel #reak that gave us the trigger for a #uy off my post" creating a setup into 6F)F. <T. $t could have #een taken off 6F).. or 6F)6- on those smaller channel #reaks had $ seen it in time" #ut the one into 6F)F. was a complete #reak of the entire day's channeling action. F$B='< 3 - BOOB 6 >$+=T<

.nce a channel breaks, !o!entu! often chan es. This is shown in Fi ure 5,. %t this point, you have to switch to lar er trends for identifyin upco!in resistance levels in the cases of !oves hi her and rely on the other technical tools in your arsenal to assist you. F$B='< 6. - BOOB -. T$ K

Fi ure 55 shows the channel acceleratin . #e put a tar et on it of I2G, due to the whole nu!ber resistance with the 5,s in =..=. This was also e:ual !ove resistance and price resistance fro! about a week a o. So, while the trend channels and trend lines are so!ethin that can be hi hly beneficial, never rely purely on one type of support or resistance. The !ore types there are co!in to ether and the !ore attributes there are co!in fro! other technical tools to co!bine with it, the better. F$B='< 66 - BOOB -. T$ K

3tili9in Support and $esistance 8evels : #art =

Applying moving averages to identify support and resistance levels. Canuary 8, +,,3 =ood dayB @ hope that you had a wonderful holiday season and have not had to let our your belts by too !uchB For those of you who could not !ake it to the previous classes, the link for the lo s is as follows; SupportF>esistance Part 5; http;FFwww.tradin fro!!ainstreet.co!FclassesFDlassSS>Part5.ht!l SupportF>esistance Part +; http;FFwww.tradin fro!!ainstreet.co!FclassesFDlassSS>Part+.ht!l .ver the past !onth @ have been introducin you to so!e of the key aspects of usin support and resistance levels in your !arket analysis and hence your tradin . <y first class in this series dealt with a basic introduction to support and resistance and usin pure price support and resistance levels in your tradin . @n !y second class we took price support and resistance a step further by applyin trend lines and trend channels. @n today$s session, for the first ti!e, we will be lookin at another type of support and resistance which is based upon price, but

which falls into the cate ory of an indicator. @ndicators are the visual representation of !athe!atical calculations based upon price or volu!e activity. The indicators @ will be coverin today are very basic ones, which are used by a lar e percenta e of the tradin populace; !ovin avera es. %s those of you who know !y style are aware of, @ a! not overly fond of indicators in eneral. <ost of !y trade decisions are based pri!arily upon price and volu!e activity. There are a lot of popular for!s of indicators that traders use for support and resistance. The proble! is that it can be very easy to rely to heavily upon the indicators and i nore those underlyin price clues. .ne of the few indicators @ have ever used in !y life are !ovin avera es. <ovin avera es are lines drawn on your chart, typically by your chartin platfor! 'unless you live in so!e archaic world and are actually plottin your !ovin avera es by hand(. They are visual representations of the calculation of avera e price !ove!ent in a iven period of ti!e. For instance, a +, day si!ple period !ovin avera e !easures the avera e price of the past +, days and !arks that point on your current daily chart. <ost !ovin avera es are based upon the closin price of the ti!e fra!e used. So, in this case, it would !ean the closin prices of the past +, days. @n the case of a 6 !inute +, period si!ple !ovin avera e it would !ean the past +, 6 !inute bars. @t is called a T!ovin T avera e because the calculations are bein constantly adQusted and plotted as prices develop. Traders tend to stick to two !ain for!s of !ovin avera es; si!ple !ovin avera es 'such as those !entioned above( and exponential !ovin avera es. So!e traders et !ore fancy than these alone, but let$s not stray too far off the beaten path. Si!ple !ovin avera es 'aka arith!etic !ovin avera es( are calculated by addin those closin prices for that iven span of ti!e and then dividin this total by the nu!ber of ti!e periods 'i.e. the +, days(. "xponential !ovin avera es are si!ilar but they ive !ore wei ht to the !ost recent data. @$ve always used si!ple !ovin avera es !yself. They have suited !e well and for that reason alone @$ve never had the desire to try anythin else. T@f it$s not broken, don$t fix it,T is the sayin that aptly applies here. <any professionals of !y ac:uaintance use only exponential !ovin avera es and swear by the! thou h, so it$s so!ewhat in the eye of the beholder. The !ain thin is to avoid flippin back and forth once you$ve picked a side. There are !any ti!e periods used for !easurin !ovin avera es. .nce a ain @ fall back on the !ost co!!on. These are the 5,, +,, 6,, 5,, and +,, period si!ple !ovin avera es. @ntraday, however, @ don$t ever display anythin other than the +, and +,, on !y charts. @$ve Qust found these two to be the !ost influential on that ti!e fra!e. These days @ do not even have !ovin avera es on !any of !y charts any!ore since @ use price action to show !e the support and resistance levels, but for those who are stru lin to et a rasp on where prices are likely to stall or reverse, they are extre!ely useful as visual clues. *ike any indicator, however, you cannot rely on a !ovin avera e alone to tell you prices will stall or reverse. @t is Qust one tool you should be usin . @t is !ore powerful when co!bined with other for!s of support and resistance and it$s also !ore powerful when pace, volu!e, trend place!ent and correction periods are interactin in a positive !anner at the ti!e the !ovin avera e hits. 9ou can learn !ore about these in !y D1 course at http;FFwww.swin trader.net, which covers all of these topics in detail. .ne thin to re!e!ber, which @ covered in the previous classes, is that all types of support or

resistance are !erely price /ones. #hile a !ovin avera e !ay have one exact price at any iven ti!e, it is not that perfect price that typically !atters, but rather the /one of that price. Think of it as havin so!e cushion to it. <ovin avera es often have !ore cushion than the other for!s of price support and resistance because every chartin platfor! tends to differ sli htly in their calculation of what the !ovin avera e is. @t tends to be very dan erous to use !ovin avera es for stops and trailin stops as a result, since it is very easy to !iscalculate Qust how !uch cushion you should ive it. @t could be ar ued that the reasons !ovin avera es work so well as support and resistance levels are because they are followed so widely and hence have a lot of the self-fulfill!ent characteristic to the!. For whatever reason, however, the fact re!ains that they do. Please take a look at Fi ure 5 of the ????. This chart displays the !ost widely followed !ovin avera es and how they serve as both support and resistance. Throu hout the entire uptrend in the ????, each of these !ovin avera e levels stalled the price action for at least several days. @n !ost instances the prices then con ested followin the test of the !ovin avera e, bouncin around in the /one of the !ovin avera e before breakin hi her. .nce each !ovin avera e level broke, it then beca!e support. The !ost notable ones are the 5, and +, day si!ple !ovin avera es. F@=J>" 5 - <aQor <ovin %vera es http;FFwww.tradin fro!!ainstreet.co!FclassesFS>S<%5. if

Fi ure + shows a close-up of the be innin of the price action fro! the previous chart. #hen support and resistance levels hit for the first ti!e, that is when they are often the !ost powerful. @n the case of !ovin avera es, when you look at a daily ti!e fra!e for instance, the first day each of these !aQor !ovin avera es hit held the resistance /one of the !ovin avera e al!ost exactly. #hen @ a! takin a position intraday, @ al!ost always look to see where the !aQor !ovin avera e price levels are on that daily ti!e fra!e, because @ know how difficult it will be to break throu h the! the first day they are tested. 0eep in !ind, however, that at ti!e a daily !ovin avera e !ay strike intraday, correct for a few hours intraday, and then still break, or, with enou h !o!entu!, break anyway. So, while this is a

ood tip to keep in !ind, like all tools, it does not work each and every ti!e. F@=J>" + - First Test of <ovin %vera e http;FFwww.tradin fro!!ainstreet.co!FclassesFS>S<%S5stTest5. if

.ne of the thin s !ovin avera es are used for is to identify trends and to assist in calculatin pullback levels within a trend. Fi ure 8 shows a typical uptrend on the daily chart of the ????. #hile the ???? spent a reat deal of ti!e han in out at the 5, day si!ple !ovin avera e, it was the +, day si!ple !ovin avera e that served as the lar er support for the trend as a whole. Prices did puncture the !ovin avera e to so!e de ree at each test of that support /one, but the /one itself held. <ost trends will use the +, period si!ple !ovin avera e for support, but stron er !o!entu! !ay hold only a 5, s!a, whereas a slower trend !ay use the 6, s!a. F@=J>" 8 - <ovin %vera es and Trends http;FFwww.tradin fro!!ainstreet.co!FclassesFS>S<%STrend. if

#hen a trend is not clear, as in a sideways con estion /one, then !ovin avera es tend to loose so!e of their power. Fi ure 4 shows such an exa!ple. The +, period si!ple !ovin avera e held for the !ost part when tested on the first day of a price !ove, but instead of causin a reversal, the !ovin avera e ave way fairly :uickly in successive sessions. F@=J>" 4 - <ovin %vera es and Tradin >an es U5 http;FFwww.tradin fro!!ainstreet.co!FclassesFS>S<%Sran e5. if

%nother exa!ple of this can be seen in Fi ure 6 where the -? has struck the 6 !inute +, period si!ple !ovin avera e on nu!erous occasions, but up until the very last test of it in T1T it !ana ed to break throu h the support and resistance for!ed by the !ovin avera e within about 56 to +, !inutes. %t T1T the prices be an to con est at the upper end of the

channel and based sideways while the !ovin avera e cau ht up to the prices instead of the !ovin avera e hittin as a result of a pullback or bounce into it. The result was that it eventually ave way to a breakout hi her. F@=J>" 6 - <ovin %vera es and Tradin >an es U+ http;FFwww.tradin fro!!ainstreet.co!FclassesFS>S<%Sran e+. if

@n the exa!ples of the tradin ran es, you !ay have noticed that !any ti!es the !ovin avera e was tested for several bars in a row before breakin throu h the !ovin avera e. #hen a !ovin avera e does this, it can be considered to be Thu in T the !ovin avera e. This !eans that is it tested on !ultiple occasions without really bouncin or fallin off it to any lar e extent. %n exa!ple of this on a lar er scale is shown in Fi ure 2. @ love to see this type of price action, because it often indicates that the support or resistance is weakenin and eventually will break throu h it. There is a ti!e factor that !ust be considered, but in and of itself, this is a wonderful concept to watch for. Fi ure 2 shows exa!ple of it as both a short setup in .ctober as a !inor break and then a !aQor break into early -ove!ber, as well as the !ore obvious buy setup in late -ove!ber. F@=J>" 2 - Prices )u in <ovin %vera es http;FFwww.tradin fro!!ainstreet.co!FclassesFS>S<%Shu in 5. if

@ hope that you have enQoyed this classB .n Canuary 57th @ will be coverin yet another for! of indicator support and resistance; Fibonacci levels. For those of you who! are futures traders, you !ay find that class to be particularly helpful. % %ll !y best, Toni

3tili9in Support and $esistance 8evels : #art >

Applying fibonacci levels to identify support and resistance. Canuary 57, +,,3 =ood dayB For those of you who could not !ake it to the previous classes, the link for the lo s are as follows; SupportF>esistance Part 5; http;FFwww.tradin fro!!ainstreet.co!FclassesFDlassSS>Part5.ht!l SupportF>esistance Part +; http;FFwww.tradin fro!!ainstreet.co!FclassesFDlassSS>Part+.ht!l SupportF>esistance Part 8; http;FFwww.tradin fro!!ainstreet.co!FclassesFDlassSS>Part8.ht!l

.ver the last couple of !onths we have been lookin at different types of support and resistance levels, startin with the core price support and resistance and then applyin it to channels, followed by !ovin avera es. @n today$s session @ a! oin to show you another type of indicator supportFresistance tool. @ will be ivin an overview on utili/in fibonacci retrace!ent levels in your tradin . The Fibonacci Series upon which these levels are based upon is a result of the work of an @talian !athe!atician na!ed *eonardo Pisano, which went by the na!e TFibonacciT. @n case this sounds a bit odd, it is !erely a contraction for TSon of &onacioT, who was his father. )e

observed that in nature there are certain patterns that appear to crop up and introduced a series of nu!bers to identify these patterns. The se:uence of the Fibonacci nu!bers is as follows; ,, 5, 5, +, 8, 6, 3, 58, +5, 84, 66, 3G, 544.... up to infinity. Startin with /ero and addin one be ins the series. The calculation takes the su! of the two nu!bers and adds it to the second nu!ber in the addition. This is very excitin to you @ a! sure up to this pointB ;( #here Fibonacci co!es into play in the !arket, however, is that after the ei hth se:uence of calculations, there are constant relationships that can be derived fro! the series. For exa!ple, if you divide the for!er nu!ber by the latter, it yields .253. 84F66 V .253535 W .253 66F3G V .257G77 W .253 3GF544 V .253,66 W .253 1ividin the latter nu!ber by the for!er nu!ber derives another relationship fro! the se:uence. This relationship yields approxi!ately 5.253. 66F84 V 5.257247 W 5.253 3GF66 V 5.253535 W 5.253 544F3G V 5.257G77 W 5.253 Traders use these ratios to !ake proQects upon a stock or co!!odity$s price !oves. #hen @ first be an tradin , a friend of !ine introduced !e to the fibonacci series. Do!in fro! a back round in archaeolo y, @ was already aware of its application in other areas, so it intri ued !e that it would also work in the !arket. @ be an to play around with Fib levels. @ kept it very si!ple. The !ain Fib levels @ use are listed on our charts pa e. They are 583.+A, 5,,A, 25.3A, 6,A, 83.+A, ,A, and -83.+A. Two other nu!bers often used when applyin Fibonacci nu!bers to chart analysis, ,.732 and 5.+7, are the s:uare roots of ,.253 and 5.253. @ do not use these !yself and never have, but you will likely see the! referenced fro! ti!e to ti!e if you decide to o !ore in depth in studyin Fib levels. F@=J>" 5 - Fibonacci *evels http;FFwww.tradin fro!!ainstreet.co!FclassesFFib*evels. if

@ be an as an e:uities trader, but @ :uickly discovered that while Fib levels will work in the e:uities !arket, the probability is even hi her in the co!!odities !arket. @ have no idea why this see!s to be true, but for that reason, @ tend to use the! !ore when tradin the "<inis than anythin else. -ow, those of you that know !e well know that @ actually use very little for indicators any!ore and often do not even show !y !ovin avera es, but this has !ore to do with bein able to read the pace and use price support and resistance for identifyin the turnin points in the !arket and less to do with the validity of the indicators. @ Qust like to keep thin s the least cluttered as possible. &oth !ovin avera es and Fibonacci levels, however, are very ood visual tools to assist in identifyin !aQor support and resistance levels in the !arket. %s a bit of a :uick review, re!e!ber that as with any support or resistance level, the faster the !o!entu! or pace of a !ove into a fibonacci level, the !ore ive it will have. #e will see this a little later usin an exa!ple fro! this !ornin of a support level @ called in the roo!. .ne of the thin s people tend to find dauntin with fibonacci levels is exactly how to draw the!. They et rather wrapped up in what trend !ove to use to apply the tool too. @n all honesty, it doesn$t really !atter, as lon as you deal with a co!plete trend !ove. #hat this !eans is that if you are lookin at a downtrend, then once you no lon er have lower lows and lower hi hs then you can use that trend !ove to apply the fibonacci levels to. Trend channels, as discussed several weeks a o, are also a helpful tool, since once a trend channel breaks, that !eans you can also use that trend !ove to apply fibs to. *et us look at a couple of exa!ples. Please refer to Fi ure +. F@=J>" + - "S Fibonacci SupportF>esistance http;FFwww.tradin fro!!ainstreet.co!FclassesFFibonacciS5. if

This is the trend !ove that we were followin yesterday !ornin . @t contained the typical three waves and was the breakdown !ove out of the prior day$s con estion. .nce the downtrend channel broke shortly after 55;,, a! "T, then you can use your trend tool set to fibonacci and connect the hi hs of the downtrend !ove to the lows of the downtrend !ove. This proQects each of the fibonacci levels fro! that point onward. #hat @ find intri uin about Fibonacci levels is that when @ draw the! on a !aQor trend !ove, such as on a 56 !inute ti!e fra!e, if @ leave the! in place overni ht, the will continue to hold in days to co!e, even as !ore trends are created on that sa!e ti!e fra!e. .bviously if you continue to do this without cleanin it up then your charts will beco!e rather cluttered thou hB F@=J>" 8 - "S Fibonacci SupportF>esistance http;FFwww.tradin fro!!ainstreet.co!FclassesFFibonacciS+. if

The i!a e in Fi ure 8 is the sa!e one as in the previous chart, but it shows the proQections of the fibs, alon with the sFr levels identified. -otice that headin into noon the !o!entu! was on the stron er side, so on the second wave of upside off the lows, after first stallin at the 83.+A retrace!ent, the "S continued past the 6,A level and into the 25.3A /one. #hen a continuation pattern is for!in , it is rather co!!on to see a security chop around between the 83.+A level and 25.3A level before breakin hi her. 9ou can use this to help proQect price tar ets on a breakout. #hen the prices are evenly displaced between those two levels, then the price proQection on a breakout is also an e:ual !ove proQection as per our discussion on pure price support and resistance levels fro! early last !onth. F@=J>" 4 - 9< Fibonacci SupportF>esistance http;FFwww.tradin fro!!ainstreet.co!FclassesFFibonacciS8. if

Fibonacci levels are not li!ited to the retrace!ents within a trend !ove. They can also proQect price tar ets and support and resistance levels and lay outside the scope of the trend !ove itself. For instance, if we look at the three wave trend lower into al!ost 5+;8, on the 55th off the 55;8, "T hi hs, then we can connect the hi hs of that trend to the lows of that trend !ove on this s!aller + !inute ti!e fra!e. @t retraced back into the 25.3A level before continuin lower. F@=J>" 6 - 9< Fibonacci SupportF>esistance http;FFwww.tradin fro!!ainstreet.co!FclassesFFibonacciS4. if

#hen it broke lower into 58;,, "T 'as shown on Fi ure 6(, you will see that it proceeded to the next Fibonacci level. @n this case it was the -83.+A retrace!ent. This helped predict a bounce off that price /one. The 9< then fell into a ran e between the ,A and -83.+A retrace!ent levels before tri erin a third wave of sellin into 56;56 p! "T. F@=J>" 2 - 9< Fibonacci SupportF>esistance http;FFwww.tradin fro!!ainstreet.co!FclassesFFibonacciS6. if

&y steppin back a ti!e fra!e to the 6 !inute charts, once can !ore easily discern this new trend. @t had three stron waves of sellin and then reversed into the close. F@=J>" 7 - 9< Fibonacci SupportF>esistance http;FFwww.tradin fro!!ainstreet.co!FclassesFFibonacciS2. if

Followin that reversal, the first resistance it ran into was a co!bination of not only the price con estion fro! !id-afternoon, but it hit the 83.+A fibonacci retrace!ent level on the head. #hen dealin with con estion /ones, it can be a little difficult knowin where in that /one the !ove will stall. &y addin a fibonacci level, it can help narrow down the price a bit !ore accurately. The second resistance level after the lows was also a price resistance level at the prior hi hs. This was the 5,,A fib retrace!ent. %fter prices reversed at that point, they fell into the 25.3A level and held al!ost perfectly once a ain. % ain, however, also note the price support fro! the previous day. #henever you have these co!binations of support or resistance /ones, those levels are oin to have !ore stren th to the!. @f you want confidence, this is one way to build it. @f you cannot identify !ore than one reason for a support or resistance level to hold, the chances are less that it actually will, or that it will to any si nificant de ree. F@=J>" 3 - "S Fibonacci SupportF>esistance http;FFwww.tradin fro!!ainstreet.co!FclassesFFibonacciS7. if

Fibonacci levels work for both intraday and all sessions ti!e fra!es in the co!!odities !arket. The ter! Tall sessionsT refers to trades takin place outside the G;8,-52;,, "T ti!e fra!e. @ actually didn$t et to sleep last ni ht because @ was tradin the "S at that ti!e. ;( %fter catchin the 8;,, "T reversal, @ wanted a way to proQect price levels for support as the !ornin pro ressed. 0nowin @ had this class today, @ threw up the F@b levels for the "S based upon that !ornin rally which be an at about +8;,, yesterday evenin . F@=J>" G - "S Fibonacci SupportF>esistance http;FFwww.tradin fro!!ainstreet.co!FclassesFFibonacciS3. if

#hile not perfect, notice that each of the !aQor stallin points on the 8 !inute ti!e fra!e fell at a Fibonacci price /one. #hen the !arket fell apart at 7;,, a! "T it barely took a second to notice the 5,,A retrace!ent level and dropped into the 583.+A instead. Since the !o!entu! was so extre!e, the exact prices surpassed the exact price of the fib level, but notice how it still con ested at it. This shows that despite the sli htly lower lows, it still reacted to that fib /one. The !arket then popped back into the 5,,A retrace!ent level and continued later on into the 83.+A. .nce a ain the was on stron er !o!entu!. )eadin into the open it fell back into the 5,,A and price support. This is at U6. F@=J>" 5, - "S Fibonacci SupportF>esistance http;FFwww.tradin fro!!ainstreet.co!FclassesFFibonacciSG. if

%s tradin continued past the open, these fib levels fro! the wee hours of the !ornin continued to hold. The resistance level @ ave early in the day at G;68 was based upon the 6,A retrace!ent, which co!bined with earlier price con estion. The support @ then posted at 5,;,4 was a reflection of the 583.+A retrace!ent, as well as prior lows 'U5(. F@=J>" 55 - "S Fibonacci SupportF>esistance http;FFwww.tradin fro!!ainstreet.co!FclassesFFibonacciS5,. if

Since that !ove fro! around 8 a! to 7;8, a! broke hi her Qust prior to the open, another set of fib lines could be drawn, or adQusted, to fit the new trend. This trend off the lows was choppier and only broke around 5,;,, when it failed a new hi h, !akin it a two-wave correction !ove instead of three-wave uptrend. 9ou could use that !ove, however, to then proQect lows at the 583.+A retrace!ent. So!e !ay have used the 3;8, a! low to the G;,, "T hi h and Qust watched that !ore concise !ove. The /one of the 583.+A on that would have been about the sa!e. 9ou would have had to have considered the fact that the !o!entu! was very sharp into the low, hence addin a bit !ore ive to it. The Fib levels drawn early in the day, however, continued throu hout the session. F@=J>" 5+ - "S Fibonacci SupportF>esistance http;FFwww.tradin fro!!ainstreet.co!FclassesFFibonacciS5,a. if

)opefully, for those of you lookin to add a bit !ore assistance in identifyin sFr levels, you will find these fibonacci levels to be extre!ely helpful. There are other applications of fibonacci in the !arketplace as well. So!e use the! for ti!e extensions to help identify how !uch lon er it will be until another reversal. For this they will use a trend !ove, calculate the ti!e of that trend !ove and proQect the fib levels out in ter!s of ti!e. *ucas nu!bers or levels are another application of si!ilar principles of fibonacci that !any traders use. So, if inclined to follow this line of study, these are two additional areas you !ay wish to explore. @ will now open the roo! up for :uestions... Qball; ood stuff Toni; ty Qerry trau!a; thanks Toni

bill i; very helpful crack8+; what fibonacci retrace!ent do u need to buy !inolo$s on sale? Toni; lol sixS; can Fibo levels be used to trade stocks intraday Toni; 5+ yes sixS; thanks, Toni )elena5,46; #hat fib level did we achieve today? ;( Toni; Qust a sec... i will show you ;( #e are at the -83.+A on the daily off that last trend !ove on the "S btw F@=J>" 58 - "S Fibonacci SupportF>esistance http;FFwww.tradin fro!!ainstreet.co!FclassesFFibonacciS55. if

N&M durin <009 ? candlestic' c(art

#ithin this chart is a couple of noticeable spots where the price Qu!ped or fell while appin across certain price ran es.

Septe!ber +nd prices closed at I+G.63. The next !ornin they apped up to I85.8, !issin !ost of the I+G - I85 ran e. .ctober 2th the prices closed at I8+.G8. The next !ornin the price Qu!ped to I86.87. 1ece!ber 4th -D< closed at I83.8,. The next tradin day it opened at I87.,, and continued to fall without once tradin in the I87 ran e.

Gap:ups and Gap:downs

#hen prices Qu!p ri ht up throu h a tradin ran e this is called a ap-up. This will often occur when positive news is released while the !arket is closed, or when a !aQor event occurs such as earnin s reports and has an unexpected upside surprise. =ap-downs occur when prices Qu!p downward and skip a price ran e. %s well, ne ative news after the !arket closes or ne ative "PS surprises can be the cause of such an effect.

The Major Types of Gaps

=aps are usually cate ori/ed in four !aQor classes; co!!on, exhaustion, breakaway, and runaway. @t is i!portant to know which type of ap fits the data since the tradin !ay continue in the direction of the lar e !ove, it !ay reverse direction, or the price !ay retreat and then resu!e its nor!al direction.

T(e &ommon Gap

%lso ter!ed area gaps or trading gaps, these leaps in price !ove!ent are co!!on and uneventful. The !arket psycholo y will chan e so!ewhat between !arket closin and openin the next tradin day. #hen the !arket opens si nificantly different the next !ornin

with little apparent reason, and it does not fit the !entality of the other ap types, it will likely be a co!!on ap. Do!!on aps are usually filled in :uite :uickly. Filling in !eans the price reverses the direction of the ap, if only te!porarily, and then resu!es tradin . .ften, the aps are filled the sa!e day. Septe!ber 8rd, -D< closed at I85.36. The !ornin of Septe!ber 4th had the price openin at I88.,4. The price Qu!ped al!ost four percent overni ht. &ut the price slid durin the day and closed three cents lower than the Septe!ber 8rd.

N&M &ommon Gap:up

T(e /,(austion Gap

%fter prices have been either trendin up or down for a while, the senti!ent !ay be nearin exhaustion. @!a ine a stock tradin downwards for a lon period of ti!e despite co!pany restructurin and i!prove!ent of the botto! line. %fter a lon while, the last of the weak hands finally ive up and sell off the re!ainder of their stock in despair. @t is :uickly bou ht up by bar ain hunters or technical analysts, the price !ay find solid round and can reverse the trend. Donversely, perhaps the stock has been cli!bin for so!e ti!e in an upwards trend. %s euphoria reaches an all ti!e hi h, the price aps up. The last of the buyers co!e out of the woodwork thinkin this is a sure bet as the current stock holders du!p their shares in reat :uantity. %fter this initial transfer and no new buyers, the price reverses direction. *ook for these two re:uire!ents when tryin to decide if the ap is an exhaustion ap.

"xtre!ely hi h volu!e 'perhaps +x the nor!al( %fter a lon -ti!e trend has been in place

"xa!inin -D< at an earlier date, we will exa!ine the blue area that shows a reversal fro! a downtrend to an uptrend.

N&M /,(austion Gap

-ext we will /oo! in to look at the price ap and volu!e a little !ore closely.

N&M /,(austion Gap

-ote the two blue circles. .ne shows the ap on the char, the other shows the volu!e spike durin those trades. &ecause this occurs at the end of a very lon down-trend, we can assu!e the price will fill and reverseHwhich it does.

!rea'away Gaps
This type of ap is considered a breakout. Prices will usually o throu h sta es of trendin , then consolidation, and back to trendin a ain. So!eti!es, after a consolidation pattern, or after toyin with a support and resistance, prices will breakaway.

Prices break upwards or downward throu h support or resistance Polu!e increases The trend usually continues

-otice on the stock %** how the price consolidates. #hen the price finally Qu!ps down to break resistance, the volu!e also increases.

.88 !rea'away Gap

$unaway or &ontinuation Gaps

The final class of ap is one that occurs in the !iddle of a trend. Perhaps the stock is !ovin up at a !easured pace. Suddenly there is an increase of interest in the stock and the price aps up and continues to trade in the for!er trend. .r the stock !ay be declinin over ti!e and there is an increased bearish senti!ent in the stock and the price aps downward and continues to trade lower.

&#3 &ontinuation Gap

%s can be seen in DPJ.%O, the trend is in the !iddle of its !ove!ent when a couple of !inor aps occur with decent volu!e as the trend continues.

S(ould 5ou #lay t(e Gap@

There are nu!erous ways to play aps. So!e will day-trade the!, others will use the! as si nals needin confir!ation for a reversal, fade the ap, and so on. Still others will shy away fro! the! alto ether since such a drastic chan e in price can have lar e repercussions if the investor plays the ap wron . @f you are interested in profitin fro! aps, you will first need to et very proficient at tellin one fro! another. <ake sure you exa!ine support and resistance levels, if the ap is at the !iddle of a trend or at the late sta es of it, and if volu!e is a supportin factor.