Identification of potential Support/Resistance

[bbmac]

There follows a brief discussion on my methodology for identifying potential support/resistance in any prevailing market, ...any addition to / discussion of is always useful;

Identifying potential Support /Resistance /SBR / RBS
[SBR: Support Becomes Resistance. RBS: Resistance Becomes Support ]

In identifying areas at which there may exist potential for Support or Resistance sufficient for price to reverse it's immediate direction, there are three (2) main factors I look for:

1. Previous price swing Hi or Lo areas
2. Fib Retrace areas.

Useful too (and could probably be considered as 3. in respect of the above) are the updates given by imarket information vendors detailing areas at which bids/offers may lie in the prevailing market and the potential strength/depth of those orders.

The Daily Pivots (Daily S3 through Daily Pivot to Daily R3) can be useful too as part of any confluence of potential Support or Resistance.

These sites will confirm where the pivots are located, the first of which having a facility to alter the time at which they are calculated;


[url=http://www.actionforex.com/forex_analysis_and_forecasts/pivot_points/]

Of course custom indicators will plot them on your charts if required.

Weekly and Monthly Pivots, as well as Mid Pivots (on any time frame) if used, should in my experience all be treated as secondary factors in any consideration of potential Support/Resistance.


The principle question in pre-identifying potential areas of Support/Resistance is whether there will be sufficient market participants/volume of orders to produce a price swing at that area. Whilst there are many other ways of identifying potential Support/Resistance, I limit my analysis in the main to the factors that may indicate this that are historically proven to be used by the market in such quantities so as to achieve this result.

In identifying the above, I seek out the areas at which as many technical factors exist as possible (the clusters) thus suggesting that Support or Resistance is likely to impede the most immediate price action In this way there is the greatest chance that price will react favourably should a set-up be identified at these areas. A set-up at such an area provides you with high probability technical confluence so as to warrant a market entry.

Dealing with points 1. and 2. in more detail;

1. Previous price swing Hi or Lo areas

Identifying previous price swing Hi or Lo areas on the time frame above my intermediate chart time frame can assist in pinpointing areas that may offer Support or Resistance should they be re-tested. I.e.

a. A previous swing Hi area should be viewed as potential Resistance if being re-tested from the underside and as potential RBS if being re-tested from the upside, following a pullback in an uptrend.

b. A previous swing Lo area should be viewed as potential Support if being re-tested from the upside and as potential SBR if being re-tested from the underside, following a pullback in a downtrend.

In identifying previous price swing Hi and Lo's, I do so primarily on the 1hr chart (close enough to my 30min ‘trend’ time frame and commonly used as the trigger by position trend traders.) On an intraday basis if on the smaller time frames - as a trend develops it may be necessary to identify such previous price swing Hi/Lo's on your intermediate chart too (for me the 5min) that may act as RBS/SBR for the purposes of acting upon a Re-entry set-up on the 1min trigger or any confirming 5min Re-entry set-up that supports a 1min Reversal set-up, following any deeper pullback/retrace in the trend.

In the screenshot you can see that the previous swing Hi 's at point X provided both Resistance when re-tested from the underside, as well as Support (RBS) at point Y, when tested from the upside. Indeed when providing support at point Y there were 2 tests of the support before a move higher.

The area shown as A in the small chart, is the effective potential Support zone (RBS) at the previous swing Hi shown as point X in the main chart. I.e. The potential Resistance or RBS zone of any previous swing Hi area like point X consists of the point between the highest candle shadow/spike to the highest price close of the candles that form that overall previous swing Hi area. These are marked by the dotted white lines. Conversely in the case of a previous swing Lo area the potential Support or SBR zone would be the area between the lowest candle shadow/spike to the lowest price close of the candles that form the overall previous swing Lo area.

As mentioned above, these zones hold true as potential resistance should a previous swing Hi area be tested again from the underside, (i.e. double /triple tops.)You can see this at the swing Hi area at point X above as there were 4 tests on this potential Resistance from the underside, before it broke to the upside. Similarly previous swing Lo areas can be viewed as potential Support if tested again from the topside (i.e. double/triple bottoms)

Where an area that cannot be identified by means of 1. or 2. above results in support/resistance; if that area is re-tested and a set-up then presents itself this can be considered as the 2nd (+) test of the area that has previously proven to act as support/resistance.

(Generally speaking the more times an area of support/resistance is tested the stronger it becomes. Until tested all areas are 'potential' areas until proven.)


2. Fib Retrace areas.

Fibs are drawn on all the major swings of the current prevailing moves that exist in the market, including the intraday move. These Fib retraces can act as Support/Resistance. Where these Fib retraces co-exist with the other factors that indicate potential Support or Resistance (1 & 3 above,) so much the better.



3. Market depth information

These updates come via certain broker news feeds or by subscription to the info-provider/vendor direct. Equity and other exchange traded instruments have the advantage of more transparent market depth.


Note:
i. The discussion above assumes a triple time frame approach, ie the intermediate time frame, the lower trigger time frame, and the higher trend time frame.
ii. A 'set-up' can mean whatever an individual trader deems it to be mean, and it will be part of their 'market edge' It could be pure price action and/or indicator based.

 

[MrGecko]

Great post BB; this identification of SBR and RBS forms the backbone of my trading, looks like we have very similar approaches (I don't use Pivot Points).

I have a quaetion for you: What is your view on SBR or RBS that held, then traded through (I mean a period where price does not seem to react to this level any more, from above and below), and returns to it in the future.... do you have it eyed for further analysis, or do you consider this level null and void. (?).

One of the best posts I've read here in a long while

 

[bbmac]

I have a quaetion for you: What is your view on SBR or RBS that held, then traded through (I mean a period where price does not seem to react to this level any more, from above and below), and returns to it in the future.... do you have it eyed for further analysis, or do you consider this level null and void. (?).

Hi MrGecko, Thx for your comments, nice to know that some one concurs with the basic methodology. Re your question, it is an interesting one and my answer is based on my observations of price action behaviour. (with apologies if it appears complicated, it really isn't if you picture the scenario in your mind)

If for example a swing Hi (Resistance) that is breeched to the upside in an uptrend, and then acts as support following a pullback (RBS) then fails to act as RBS on a 2nd test, I would comment as follows

a. If the RBS area fails on a re-test it is more likely to do so if the first successful test of it as potential RBS resulted in a Lower High (LH.) Effcetively you would have seen a High (H) at the original Swing Hi (Resistance) followed by a probable Higher Low (HL) before the breech of the H to the upside to a Higher High (HH) and the pullback to the Swing Hi (H)- former resistance now potential RBS, at what would be an effective HL, followed by a LH that threatens the chances of success of the now proven RBS (former swing Hi) area acting as Support again, the LH being a classic potential reversal pattern.

b. The area may fail to act as RBS again on a re-test that followed a HH from the first test, as this again would indicate a deeper pullback from the HH but an equal HL not an absolute HL, and again this may be a sign of weakness in the uptrend, though not as weak a sign as the potential HL in the uptrend example detailed in sceanrio a. above

In both these scenarios the chances of a ' with uptrend ' follow thru to Higher Highs is diminished with this price action...that is not to say that this will not happen, just to say that more care should be excercised.

If a potential SBR/RBS area does not hold on the first test then the area can probably be viewed as weak potential Support or Resistance respectively, ie if in the uptrend example a potential RBS area fails to result in a Higher Low and price sells through the previous swing Hi (H) looking more likely to reverse direction completely or at least result in a deeper pullback, a retest of the broken potential RBS area may offer some limited Resistance (and probably none at all if the potential RBS was a fib as fibs that have not beeen respected as retrace levels are even less likely to act as the contrary resistance (in this case) or support on a re-test from the opposite side) ie A failed potential RBS/SBR is less likely to act as Resistance/Support respectively on a re-test from the contrary side than had the area held as RBS resulting in a. or b. scenario decsribed above. In these circumstances I tend not to view the area as potential resistance/support.

NB: when a potential RBS/SBR area identified on your intermediate or higher/trend time frame fails to hold on a pullback, but then finds support / resistance respectively lower down/ higher up after a depper pullback, very often it does so at a potential RBS/SBR area on the next time frame up from your higher/trend time frame. in these circumstances you will effectively be looking for reversal set-ups on both your intermediate and higher/trend time frames as by then those trends maybe opposite to those on that next time frame up from your higher/trend time frame.

 

[MrGecko]

Right... Have to say, I broke out to pencil and paper to keep track of all the High's and Lows, but I'm with you.

W.R.T. Scenario a:

In these circumstances, given the Lower High set by the reversal at 1st test of R2S, I would be looking for some PA consolidation. Failure to reach at least the Higher High (forming a channel or trading straight through) is a consolidation signal IMO; I would draw a descending Trendline from the Higher High to the second Lower High, and be looking for a chart pattern to develop (Flag, Descending triangle or Pennant most likely). With the next support eyed at the first Higher Low (that is, the low of the retracement from the high that set the resistance level originally, perhaps w/ a fib for back up), this is where I would concentrate on the PA - either for yet another retracement (this time a retracement up in a downtrend), to meet the R2S level or the descending TL, or to break straight through the once support at the first Lower High (in which case we have a new downtrend, and I look for a short on the breakdown and trades at retracements and retests of the next "cluster" of levels to the downside.

W.R.T. Scenario b:

In this case, I too would have all eyes on the Higher Low for support; at a retracement here I would be looking for longs, with stops at new Lows, targets at the R2S level + Fibs; second failure at the R2S level (this time failure at resistance), is a further bearish sign IMO, with a Head and Shoulders pattern looking to be tested.


It seems we are reading off the same Hymn sheet. Can I ask if you use Candlestick analysis to concentrate on the nitty gritty? Or Market Profile at all?

Great couple of Posts, much appreciated.

P.S. you may - or may not - be interested to take a quick look at the thread called "Mr. Gecko's Briefcase"; there is a post where I describe my interpretation of the anatomy of a breakdown, which I believe is somewhat similar to the situation you describe above.

http://www.trade2win.com/boards/first-steps/30825-mrgecko-s-briefcase.html#post466394

 

[bbmac]

Can I ask if you use Candlestick analysis to concentrate on the nitty gritty? Or Market Profile at all?

Very useful further analysis/observations/techniques re the a. and b. scenarios described in your post above, thanks for that.

Re your question above, I tend to use indicator based set-ups with price action confirmation, these are based on hidden/reverse and regular divergence and oscilator extreme readings coupled with band/channel deviation confirmed by price action itself, For eg (general rules of thumb)

i. If following a pullback in trend and acting at a potential sbr/rbs area identified on the intermediate chart I would look for a hidden/reverse divergence/extremes based set-up on my trigger chart.

ii. If acting upon a once tested sbr/rbs area identified on my intermediate chart I would look for a trigger chart regular divergence/extremes based set-up with an intermediate chart hidden/reverse divergence based set-up to confirm

iii. if acting at a potential sbr/rbs area identified on my higher/trend time frame chart, I would be looking for set-ups as decsribed in ii. above.

iv. If acting at a once tested sbr/rbs area identified on my higher/trend time frame I would look for a trigger and intermediate time frame regular divergence/extremes based set-up along with the higher/trend time frame hidden/reverse divergence based set-up to confirm.


Note oscillator extremes, effectively refers to extreme overbought or oversold readings, ie extreme overbought in a downtrend and extreme oversold in an uptrend at potential sbr/rbs areas.

 

[bbmac]

P.S. you may - or may not - be interested to take a quick look at the thread called "Mr. Gecko's Briefcase"; there is a post where I describe my interpretation of the anatomy of a breakdown, which I believe is somewhat similar to the situation you describe above.http://www.trade2win.com/boards/first-steps/30825-mrgecko-s-briefcase.html#post466394

Thanks for the link, will take a look over next few days.

 

[bbmac]

quick example of a potential sbr zone at the previous now breeched swing lows (support) on the 1hr chart today in gbpusd....see screenshot;

NB: In between the 2 areas mentioned on the screenshot there are of course further fib retrace levels, particularly of the falls from 7838 and 7649falls

Update Tues 7th Oct 09: strong £ buyiong in asian session following RBA 1% rate cut saw the above potential sbr areas breeched to the upside, resistance precipitating this morning's fall to new lows starting in the asian session, at the previous 1hr swing hi/lo area shown in the new chart attached this potential sbr/res area co-existing with the 3 fib cluster; 61.8% 7839-7337, 23.6% 8668-7337, 38.2% 8119-7337

 

[bbmac]

The screenshot tells the story of a couple of examples of RBS confluence as gbpusd established a new uptrend during today's London/European session.

You will see that both areas marked by the white dotted lines on the 5min chart (left) were the 'zones' at previous swing highs (detailed by the methodology) that when tested again following a pullback from the upside, provided resistance.

In ascending order the first also had previously touted offers at the 7545/55 area and the second (for which the left hand chart shows the actual hidden divergence based trend re-entry set-up I look for) had the further confluence of previously touted offers 7570/75 area as well as the then 23.6% of the intraday move up.

The point is that even on these lower time frames (ie a 1min trigger) at 5min intermediate time frame previous swings, the methodology detauiled in the first post of this thread and further discussed hereto, provides a useful addition to any technical trading arsenal. Whilst the second entry at poitential rbs failed to see a with trend follow thru, some consolidation settling in as i write this, the set-up still produced some 40pips gain avaialble.

Note too how the pairing found what was effectively a triple top resistance on the 1hr t/f in the previous swing hi/lo zone at that area shown in the second chart in last post, not surprising after a 337pip run up off intraday low.

 

[bbmac]

Just looked back at charts and have seen a 2nd test of the first RBS zone (now RBS not potential RBS as has been tested once) refrerred to and shown in screenshot in above post. The RBS zone is shown on the higher time frame on the chart on right in attached screenshot below. In these circumstances and per the methodology, this time there was an intermediate time frame (5min) Hidden divergence based set-up (shown on the left hand side chart of the screencap below.) Of course this entry could be timed by either regular divergence or indeed oscillator extremes on the lower trigger time frame (1min) and indeed this set-up at the RBS zone with an oscillator extremes based set-up (not shown here.)

So effectively a deeper pullback off resistance, and a second test of RBS...again I am uncertain whether it has the 'legs' to make a with trend follow thru and new highs this late in this London session....that said from the 1min trigger set-up entry iyt has seen over 50pips gain at time of writing

 

[bbmac]

Following on from above scenario, the screenshot shows the Resistance at today's current Highs in gbpusd. You can see that the previous swing Hi/Lo area had provided resistance as well as support, ...resistance again at today's asian session highs, made the london session hi an effective triple top.

 

[bbmac]

Re SBR: Another test on the resistance detailed in last post, this is the now the 4th test of this previous support area from the underside, acting as resistance (SBR) with the further confluence of the 38.2% fib of the 8222-7317 move there also

 

[bbmac]

Good example of RBS today in eurusd. The screenshot shows the potential RBS zone at the previous swing highs and you will see that price re-tested the zone from the upside following a break up and pullback,...the former resistance acting as support now...although price went on to find resistance higher up, a 'with trend' follow thru did result in 50+ pips gain available from an entry timed on the time frame below.

 

[bbmac]

Good example of the confluence of 3 potential SBR/Resistance factors in gbpusd today that has seen a 70pip+ correction from a 7177 hi at time of writing;

1. The previous 1hr swing lo area ...potential SBR (zone shown between the 2 dotted white lines) This area was also a minor previous swing Lo on the 4hr chart.
2. The 38.2% of the 7843-today's low 6776 fall.

and something I did not mention so far in the methodology discussed here;

3. The descending 1hr resistance trend line (1st test)

ie Trendlines joining the Hi/lo areas of price swings on the 1hr chart + can be useful in assessing potential supp/res

The screenshot below shows these factors in play;

 

[bbmac]

update to post above: the potential sbr/resistance area saw a 320pip sell off from a 7177 area hi. It was a perfect confluence potential resistnace facors re this methodology, ie a previous swing low (potential sbr,) a fib, MNi touting offers in the 7175/85 region and of course the 1hr descending resistance trend line (1st test)