a) I am getting getting old, and;
b) most of my cranial activity is allocated to tracking the prices of ruinous second-hand Italian sports cars on Pistonheads
But a simplistic approach can still be effective when it comes to markets. I have always liked the idea of support and resistance - previous significant highs and lows that were important in the past and could well be important in the future, bla bla bla. Quite a few years ago I remember reading something that pointed out surely the best short term support and resistance levels were the previous days high and low. This was a revelation to me at the time and it was so simplistic - but like so many things makes perfect sense.
It doesn't (thankfully) take much to figure out why this might be useful. Yesterday’s low and high were the points where the consensus of opinion was that the price was too cheap (the low), or the price was too expensive (the high). That’s it.
So, how the price today acts around the previous high and low may be useful to place a trade, with a half decent risk versus reward. If the market approaches the high and looks a bit nervous, it’s a possible short with stops above the high - and vice versa for the low. And if the market breaks through the levels - well, things have changed. Possibly. And possibly time for a new trend.
There’s not much more to say than that, but here are some examples from this very week. (week commencing 14th April)
S&P 10 Minute Chart, Friday To Tuesday (click to enlarge)
Jumping now to Tuesday, the S&P started strong, breaking the Friday and Monday highs. Many people following this simple support and resistance idea, me included, would have been wrong footed by this - bought in, but swiftly reversed. So stopped out for a hopefully manageable loss.
The market then really nose-dived for a good couple of hours. But where did the weakness stop…? Almost on the previous day’s in-session low. A logical place to buy in, which was rewarded by the market recovering at the same sort of rate it dropped.
Going into today (Wednesday 16 April) it is a similar set up to Tuesday - it looks like the market is above the previous day’s highs which is bullish, a pullback looks like a buying opportunity.
Nothing’s perfect and guaranteed to work all the time of course - but how a market reacts around the previous day’s high and low can help try and figure out short term probable direction. Probably.
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