Know your the Levels

During a topping process, there is a "candidate high" formed somewhere in the cycle. In our present case - the candidate high is the August 7th intraday high of 1018. We assume this to be the top and seek evidence of a series of lower lows going forward. Ideally, we would see a series of lower highs as well. However, that does not happen so easily. Generally, there are attacks ("tests") of the high while lower lows are made. This can be frustrating for a short position and often leads to premature abandonment of a trade. The problem is of course knowing when to hold a position or leave a position. For me, I like to start with the basic "levels" analysis.

Here is my approach:

First, identify all of the key support and resistance levels, based directly on the tops and bottoms of printed price action. Do this for the 10 day, 3 day and 1 day charts, with a period of 5 minutes. Of course, you must already have in your mind a clear understanding of the macro charts - 1 yr, 3yr, 10 yr. On these charts, draw horizontal support and resistance lines and determine where the price sits relative to the number of resistance levels above and support levels below. If you are short, you hope for more levels of resistance above than levels of support below. If your are long, the reverse applies. Treat these as your DEFCON levels.

Second, draw your best approximation for the top trend line and bottom trend line. Note the points of intersection with the support and resistance levels. Also, assess where the current price sits in relation to these trend lines. Where is the price headed assuming that the price action tends from end to end? If it is headed to the top trend line, consider a buy. If it is headed to the lower trend line, consider a sell. That consideration should take into account the number of lines in the way.

Finally, add a couple of fib tools to the mix. Of course, drag the ends of the fib tool (grid and fan) from local high to local low. Use these tools on all charts. Where is the price action with respect to each fib? Study the 38, 50, 62 retracement levels. Trust these tools on charts where the fib grid aligns with existing support and resistance.

When analyzing, try to inspect movement towards or away from points with the greatest number of intersections. Each time a point is crossed by a line, the significance of the point and its level become greater.

With a solid understanding of the levels in your charts, you can apply further technical analysis to assess price movenment during the chart period. That's for another post.

Looking at the S&P, here are the key levels:

1018
1013
1007
1002
998
992
987
978


Happy Trading.