Tuesday, March 6, 2012

Issue 088 - How To Weeee'd A Chart - Part 4

Happy New Year!!  Alright, the last few issues, we saw how momentum works through its 2 engines - Accumulation and Distribution.  We also saw how the price action looks during these times when momentum is shifted from selling to buying and vice versa.  We touched on a little bit on how legs help you determine how levels are gained and or lost.  This last bit of info that you need to start understanding what you are reading is one of the most significant things you must learn to spot significant levels.  The only way to spot them is by reading and understanding the price action.  These things are called "levels", "support", "resistance".  Some other people call them "poc" and all its variations (vpoc, mr. spoc).  People don't get these levels and they don't really understand why the market did what it did because they don't know that the price will always target the previous support it lost that eventually allowed the price to cascade down to where the price found support to start the rally or move up.  People come up with stupid calls like "false pops" and "false drops".  Logically they can't say it was false because it happened.  But if these were logical folks to begin with, they would understand that the market consistently move in the same manner over and over again and there is no such thing as false pops and drops.  Its just idiocy to think that way.  It also gives them an escape should they fail to read the move correctly.  "Oh yeah, it did this false pop/drop just to shake me out of my stop and you know those big guys are taking my money." 

The progression is clear.  What are false pops and false drops?  If you read a little bit about legs, you would understand that those "false" whatever always seem to hit, the leg start.  Through that simple mechanics, it is far from false, but a constant function.  And we know that the momentum is setup through progression to support the resulting move after the "false" move occurs.  False whatever will always happen near a leg start.

What is a leg start?  Leg starts are significant levels of support or resistance.  It is generally near the tops or bottoms of a move up or down.  They are the level where you will find your consolidations forming their base whether it be a peak or valley.  It is the initial level of support and always the last level of support to be tested on the leg.  Understanding how to identify levels of support/resistance and differentiating them as leg starts and understanding why they are key levels is a skill that a trader has to gain.

I wont go over the entire blog entry on peaks and valleys, but what is key is what the key level of supports are from those peaks and valleys.  Peaks and valleys are the start of legs.  Their tips are the result of testing of previous support or current support.  And they are key in the progression of accumulation and distribution  as a collection they are the top part of head and shoulders and double top or their inverse chart pattern counterparts for accumulation patterns.  And they are also produced as juts up/down on any move up or down which are more prevalent in lower time frames.  So far, all I've told you is obvious stuff.

So lets talk about something not as obvious.

When retracing back up/down a leg, one way to find a key level at the peaks or valleys is to find the candle that closed above(for the move up) or below(for the move down) the key level of support.  In order to do this, for the retrace up the leg down, you must understand the move up from the leg before your move down.  Generally both these levels for the move up or down is the same level.

Off this weekly chart, in order to understand why this level here is significant, you can first get your first clue from the immediate leg to the left.  From here, you are interested in the 12/20 candle.  This candle closed above a significant level of resistance in order to gain a level of support.  And the 12/13 candle demarcates the level of interest as the level that it could not close above of, by wicking there.

Now sometimes the candles are not so straight forward.  That is why I suggest that you look to the leg to the left of the current leg.

When you zoom out, you get a better sense of how important a level is.  The logic of understanding the mechanics is simply:  what is the level that a candle such as the 12/20 candle had to close above in order to gain a level of support.  The qualification is gained by looking at the price action where the level acted as resistance:  first by wicking there as resistance or support and second by doji's.  How do you localize these areas?  Look for peaks and valleys.  Look at the level where they congest.  Look at the base of their congestion.  And then look for the relationship as described above.

As you can see from this example, the support found in 3/14/11, was a support they tried to hold from 7-9/08 and 5-7/06, was a level of resistance in 7-9/05, support in 5/01, 10/99 and then finally the level of support gained in 12/28/98 that was the level of resistance in 12/21/98.

So how does it look in a daily perspective or a lower time frame?  Much like the weekly as you can see the expected relationship or mechanics is observed.  An area of consolidation before the move up is also, a leg start.  It is all just rocket science.

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How To Weee'd A Chart  --  Part 4 by kewltech is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 United States License.
Based on a work at kewltech.blogspot.com

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