For those of you who could not make
it to the last class, the link for the logs is as follows:
Today's topic is an expansion upon the previous segment where I
introduced you to the basics of support and resistance levels. In the
last class I talked about the various types of price support and
resistance. These included whole numbers, previous highs and lows,
congestion zones, and equal move or measured move levels. Gap zones
also fall into this category.
Today's topic deals with a more difficult type of
support/resistance level to identify: trend lines and trend channels,
as well as how to use
them in your trading. I will begin with a very brief review of what
exactly support/resistance levels are and how to approach them.
Support refers to prices under current
levels, while resistance refers to prices above. Essentially, they are
price areas where a security is likely to have
some sort of reaction to that price area. The key word here is "area,"
or "zone" is another word that could be used. Support/resistance levels
are NOT exact prices, even if you may think they should be! Even $100
is not an exact resistance price if a security is moving higher into
it. Rather, it is the zone around that price, which can be wide if the
volatility is high and momentum is strong heading into it, or can be
rather narrow if volume is low and the momentum or pace of a move into
the resistance is gradual.
From last week you may recall that we looked at a specific type of
price support/resistance whereby we looked at previous highs and lows
as support/resistance levels. Today's class builds upon that concept. A
quick review of it is shown with this example in Figure 1 of the ES
from the last
couple of trading days. The ES has been in what is called a "trading
range" or "congestion zone" during the past 4 sessions. This means that
most of the prices fell within a given price range. On the 17th, the
began with a narrow range. #4 and #5 marked the lower end of that
range. #4 was support, which held when tested a second time.
FIGURE 1 - ES 15 MINUTE
The third test of a support or resistance level is often the one most
likely to break. The ES did so early on in the afternoon. Once support
breaks, when it's tested again, such as at D and then E, it becomes
resistance. This concept is repeated on a larger scale with A, B, and C
as highs and 1, 2, and 3 as lows. If you were watching the market into
the close, you will notice that the ES tested that upper channel
resistance again afterhours, making this the third test after the move
higher from mid-day on the 18th. (Update: It then broke higher later in
afterhours trading and opening with a significant upside gap into the
The idea of trend lines
and trend channels takes the basic idea of
previous highs and lows as support/resistance levels and turns it on
edge. So, instead of the sideways trading range with obvious highs and
lows, we now are beginning to look at other types of trends using the
The sideways trend is just one of the three major trends in a market. A
trend is simply the direction of price movement. An 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
comparable levels, although often they will favor one end of that range
over the other, much as they did o the morning of the 17th in the ES in
the first example, where they favored the lows.
FIGURE 2 - UPTREND
Figure 2 displays a
typical uptrend. The blue lines connecting
the high points and the low points are the trend lines. Combined, they
make up the trend channel. Now, to form a trend line, you simply need
two points of reference to go off of. In the sideways trend we only
needed one: the previous high or low. In a directional trend, such as
an uptrend, we need two highs with the second higher than the first. In
this image those points are A and B. Before any lows following B are
even made, we can go ahead and connect those two upper price levels and
extend the line connecting them outwards. This becomes the trend line
resistance levels. As it is tested on a subsequent move higher, the
zone around that line serves as a level where prices are likely to
react in some manner to that resistance zone.
Keep in mind what we
talked about last time: The faster a resistance level hits,
the more "give" it has to it. So, if the momentum off the low from #2
is faster than off the low from #1, then it can push through that upper
trend line's exact price level a bit more before bouncing back in.
the prices in this chart returned to the lower channel at #3, they did
not make it back to the upper level again. Instead they only moved up
about halfway or a bit more before dropping through the lower trend
channel. Now, at this point, that lower trend channel support has
broken and becomes resistance on any move or push higher. This is the
case of where it is tested in D. If you
miss out on the first or even second entry trigger when playing reversal patterns, then "D"
good level to pick up a short position. Often I do not even wait for a
smaller trend channel to form and break, but will enter the short as
soon as I see any stalling within that move into D.
FIGURE 3 -
RIMM 50 TICK
Obviously, as with any
tool for reading the market, the support and
resistance zones are just one factor in a larger picture. Figure 3
great example from this afternoon where the trend channel
support/resistance action in play. The initial trend channel can be
drawn by connecting A to B and then extending that line downward and
connecting 1 to 2 and doing the same.
Notice 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 before. Hence, the support had more "give" to it. After
bouncing back, the channel held again at D, forming a smaller and
slower drop around 15:20 ET. The door was now open for a confirmation
of the trend change.
FIGURE 4 - RIMM 50 TICK
Another example soon
followed in Figure 4. What I want you to pay attention to here
is that when RIMM tested the upper trend channel at C, it did not
immediately pull back off that level. Although earlier it had pulled
gradually in D in Figure 3, this time it hugged it. Both of these are
the same thing: momentum change. By hugging the resistance level or
pulling off it very slowly, it creates the scenario for that resistance
level to break. Now, in this second example it attempted to do so too
quickly, and hence congested longer, however the theory is still the
of the channels is found in GOOG from today in Figure 5. The
channeling action in GOOG was a primary contributor to it being the
main focus of my attention this afternoon. In GOOG we had a series of
channels forming and breaking, each more bullish than the next.
FIGURE 5 - GOOG 50 TICK
first channel began right away out of the open. It was a slow downtrend
10:00 ET. GOOG did not hit the exact price of the upper trend line at
B, but it did come into that price zone. It then did not make it back
to the lower end of the channel, instead stalling about halfway to
where the lower channel line would be and rounded off. The stock
returned to the upper channel, but again only held it a few minutes
before breaking through. This trend break alone was not enough on the
larger time frames to yet sustain an upside move. As the day
progressed, however, the channel did as well.
As a channel
develops, the last segment of the channel often gains
importance over the first. So, the result is that I am often changing
my trend line to adapt. Drawing trend lines is more of an art than an
exact science, which endlessly frustrates those traders trying to
devise programs to display them automatically. Often I leave out
extreme ticks when I am looking at a trend line, or I pay the greatest
regard to the bodies of a candlestick chart and look for my trends to
closely associate with them.
FIGURE 6 - GOOG 50 TICK
Figure 6 shows the
the trend channel out of the open in GOOG. "B" had not quite touched
upper channel line, so I drew a new one to project out the upcoming
support levels. Notice that the move into 10:15 ET corresponded to the
previous low, which is another major type of support level. Of
course the time of the day also factors in. In terms of the channel,
however, that resistance from the trend channel on the upper end of it,
when extended, quickly became the support only 15 minutes after it had
FIGURE 7 - GOOG 1 MINUTE
Figure 7 takes this channel out further and looks at the larger
channel of the formation this morning. #1 is the support level we
were just looking at. It held and a higher high was made, but still
under the initial morning lows. By pulling back again into 11:00 ET, it
formed a second low to create a symmetrical triangle. At that point,
once the prices began to move higher at about 11:15 ET, the highs from
A and B could be linked and extended, as could the lows from 1 and 2.
Notice that as GOOG moved higher into 11:30 ET, when it hit that upper
channel, it hugged it throughout the majority of that mid-day
correction into noon off that high. This continued to develop the
bullish bias in the stock into the early afternoon.
looking at the last segment of that trend channel, it
became support once broken over noon, holding on lows around 12:30 ET
and into 13:00 ET. This can be seen in Figure 8.
FIGURE 8 - GOOG 1 MINUTE
With each pullback into
the afternoon, the trend channel shifted. The
first drop in the morning was the strongest, followed by a symmetrical
triangle and then an ascending triangle, which is displayed below in
Figure 9. At "D", GOOG had pulled up
through the upper channel line. It is the pullback off that channel
break that gave us the trigger for a buy off my post, creating a setup
into 13:30 ET. It could have been taken off 13:00 or 13:15 on those
smaller channel breaks had I seen it in time, but the one into 13:30
was a complete break of the entire day's channeling action.
FIGURE 9 - GOOG 1 MINUTE
Once a channel breaks, momentum often changes.
This is shown in Figure 10. At this point, you have
to switch to larger trends for identifying upcoming resistance levels
in the cases of moves higher and rely on the other technical tools in
your arsenal to assist you.
FIGURE 10 - GOOG 50 TICK
Figure 11 shows the channel accelerating. We put a target on it
of $690 due to the whole number resistance with the 10s in GOOG. This
was also equal move resistance and price resistance from about a week
ago. So, while the trend channels and trend lines are something that
can be highly beneficial, never rely purely on one type of support or
resistance. The more types there are coming together and the more
are coming from other technical tools to combine with it, the better.
FIGURE 11 - GOOG 50 TICK
Thank you for coming!The
room is now open for any questions.
notice you used a 50 tick chart for RIMM and GOOG and mentioned an 800
tick chart in the room for ES. How do you decide what number of
ticks is appropriate and when it is better than a timed chart.
securities it can be a bit of trial and error. You want it to be
a size whereby you can see the waves of buying and selling and make out
the trends. I use three monitors and have all kinds of time frames up.
If you cannot make out solid trend moves then you are
too small or if prices are just flying and your chart is moving too
fast then back up some. I use the 25 and 50 tick charts for timing, but
the 100-800 for the actual larger setups. Although I admit I will scalp
a setup on them if they happen to stand out.
scalp of those channel boundaries yourself?
do when they are combined with the other technical tools I use. http://www.swingtrader.net/
They are laid out in great detail in this course... :)
times of day do you look at for trend changes
reversal periods fall at 15 and 45 min past the hour in the morning and
then shift to on the hour and half past in the afternoon. 12:00 and
14:00 are big ones. Eastern that is.
you filter the securities?
very basic scans: Percentage and price gainer and losers, near 52
week highs, and gappers.
when drawing a trendline I've heard that on the starting candle you
start at the top and that includes shadows. Is that correct?
is where the art of it comes into play..... If the shadow is an extreme
tick and most of the prices weren't actually trading there then I
ignore it Otherwise, I use the shadow.
trend is very choppy and there are a lot of extreme ticks focus on the
bodies of the trend and make a trend channel that is a channel meaning
Connect the highs of the majority of the bodies for the upper channel
with one line and then connect the highs of the tails so then you know
that as price come back up into that zone that it is resistance.
is our next class :)
3, 2007 4:15 ET Utilizing Support and Resistance Levels - Part 3
Applying moving averages for identifying support and resistance levels.
January 17, 2007 4:15 ET Utilizing Support and Resistance Levels - Part
4 Applying Fibonacci levels to identify support and resistance levels
(focus on EMini trading).
do you use as momentum indicator(s)? ty
is stronger for support and resistance levels : moving avgs or fib
It really depends on the nature of the trend at play. Fibs work
best in choppy markets ranges etc Whereas the moving averages then work
better on directional trends
people say the the futures markets will lead the stock market on
intraday basis how does it work, and what kind of futures do we look at?
think that if you look at stocks that are heavily weighed in one of the
indices that this can work, but I have not found it to be worth my time
to attempt to focus on. I do prefer setups in stocks that are favoring
moves in the same direction of the overall market though if this is
what you mean. I will use the futures to give me a larger picture of
what the most likely price action for the day will be... such as this
afternoon the market was biased higher, so I focused upon a security
which would take advantage of that. There are many securities I would
trade that may not directly be influenced by larger market activity. I
trade a lot of news-related moves in securities and they can move
higher easily even as the market falls. Although often entry and exit
triggers will correspond to major index reversals or support resistance
levels. I have noticed that a lot of the time as I am playing AAPL that
the market will hit a support level something to turn it higher and I
will take my position in AAPL based upon that before it confirms on
AAPL itself and do the same with other securities that are heavy in the
indices, but I do not really study it per se.
your favorite stock ?
changes over time. Favorites lately are JASO, BIDU, BIIB, ISRG NOV and
ESLR. those come up for me a lot. I have some I hate and won't
touch.... DELL and ICE and HANS :)
you please clarify for me the difference
between the main and secondary trends? Is the second trend steeper?
primary and secondary
trends are dealing with the fractal nature of trends... meaning that
each trend is comprised of smaller trends For instance, if a
is heading higher the pullbacks would be smaller (or secondary) trends
to the downside. whereas the upside move as a whole is the primary
trend. or "main" trend :)
for excellent session !
enjoyed the session! Thanks much!
are welcome :)
, happy holidays
welcome mike :)
the class T... good night all
you everyone for making it!
you. Good night!
is this the
same chatroom your Online Trading room is hosted?
will be on vacation over the holidays but there will still be lots of
regulars in here posting so feel free to drop by if you wish
do you give
actual buy sells
share what we are watching for buying and selling but there are not
alerts and such stocks are posted in purple like GOOG basing at highs
is there any
indication to the chat user that you are going to buy/sell
will post the pattern if applicable and not just a breakout like: APPL avalanche
17:39:23 Avalanche: For more information on this setup,
please see http://www.tradingfrommainstreet.com/techanalysis.html#4
which then gives the details on
what that is for new people http://www.tradingfrommainstreet.com/techanalysis.html
here is the main link for patterns
pattern names are the main clues to what buy/sell indications?
yes bases at highs are buys bases at lows are short
anything i post will be pretty obvious and if not, just ask :)
is what I was trying to determine, if it is just chatting or real
trading room for traders
both :) its not a service based room though meaning i am not here to
generate calls for people
is there a
way to tell if a trade will be a winner or a loser?
are winners.. duh
I will have to try it myself. Price it right...yes
class thanks !
here to view the logs to Part 3.
2007 Bastiat Group, Inc.
NOTE: COPYING AND OR ELECTRONIC TRANSMISSION OF THIS DOCUMENT WITHOUT
AUTHORIZATION FROM TRADING FROM MAIN STREET IS A VIOLATION OF
DISCLAIMER: Trading in commodities and securities may not be suitable
individuals. Consult your broker or other professional to determine
suitability. The discussions provided by Trading From Main Street are
educational purposes only and should not be taken as a recommendation
to buy or
sell the referenced security. Past performance is not indicative of