This is a continuation of a recently published blog post that featured the MarketLife PowerLevels. These values are predicted as support and resistance with a robust quantitative advantage available in all time periods and before the bar is opened.
More importantly, the concepts on this blog can be applied to trading support and resistance levels of all kinds and types. These are general ideas for bypassing levels in the financial markets.
It goes without saying that if you want to trade or focus on levels, you need good levels! Like most things in commerce, many of the levels people focus on have no advantage. (A good example would be moving averages. Round numbers are also questionable.)
But if you do a little bit of thought and work a lot, you can find levels that tend to shape price movements. Some examples to investigate could be: highs / lows of the past few days, intraday VWAP, significant high / low pivot points on daily or weekly charts, pinning levels when options expire, etc.
The examples in this blog post focus on our MarketLife PowerLevels. However, you can expand the ideas and trading configurations to other levels without loss of generality.
The six levels act
In my experience, trading with support and resistance is all about knowing where a level is and then watching the price move as the price moves into the region. This is one reason I think saying and thinking all the time is vital expected Support and resistance – this one word shapes your thinking. When you add this word you automatically think of probabilities and “Maybes” instead of “shoulds”, “wills” or “musts”.
Once you watch the action in a level, few things can happen:
- The level can Stop pricesat least temporarily.
- The level can Attract prices.
- The level can Sell prices.
- Or sometimes just the level has no influence at alland the price behaves as if the level isn’t even there
Now it seems we have just outlined every possible outcome, but this framework has tremendous value. We can actually reduce it to six trades:
- polarity: This is a classic principle from technical analysis that supports a resistance level once broken.
- PowerPull: In this trade, a level has an almost magnetic attraction. We often see this on daily stock index charts as prices near an all-time high.
- PowerPush: If a bar opens near a level and then swings away, there’s a good chance the day’s high or low has just been set.
- Yo-yo: Sometimes the magnetic pull of a level keeps prices back and forth on one level over a longer period of time.
- Pong: Two levels, especially when they are close together, can keep a market in a tight range.
- Clean Air: With our PowerLevels there is a higher probability of a large expansion until the bar closes as soon as the most extreme level is exceeded.
Let’s look at some specific examples for each trade. In most cases we show both a “schematic” picture to illustrate the general principle and an example from real market data.
For many traders this is checked because many technical analysis texts focus on this concept. A resistance level, if valid, will likely provide some support in retesting from above after a break. (You can also turn everything in this post upside down: once the support is broken, it will likely act as a resistance.)
This is how it looks schematically:
And here is an example of this trade from recent market action:
1: The early morning resistance is broken and then acts as a support. The support fails with the second contact and …
2: Support breaks at A and then act as resistance at B. These are messy tests but this may have reflected the volatility at the start of the European session.
3: The resistance level eventually breaks (after several tests) and then offers solid support at B. (which happened to trigger a solid boost from the New York Open.)
4: At A, the expected resistance level provided no resistance at all, but it worked neatly as an aid when retesting at B.
If a level is “active” and works, the closer a market gets to the level, the more attractive it is. This is a principle that we see most clearly on the daily charts: as stocks or indices approach all-time highs, the chances, albeit marginally, that those highs will be exceeded become very high.
This trading also works intraday. Schematically, it can be useful to think of it as a “woosh”. As the market approaches a level, momentum can increase. It’s almost like the level is a magnet.
And here’s an example of how this happens towards the end of the day in the S&P 500. Once the market broke towards the level, a dynamic conspired to drive the market into a touch of the level.
This is fun and is one of those trades most closely related to our PowerLevels. Because of the way they are generated, they have tremendous power to shape market actions for that day. If the market opens and moves away near any of the levels, there is a very good chance that the high or low has been set for the session.
This table shows daily bars, with the active values for each day shown as dots. We’ve spent a handful of days with arrows where the near-exact high or low was determined by an early test of a PowerLevel:
It’s a bit nuanced to trade this intraday. Sometimes you can just see a sharp movement (as in the table below). Sometimes you need to let the market set up an opening range and then trade a breakout of the opening range. And sometimes you may see a move that initially turns out to be wrong and needs to reverse when the session high or low is removed. The concept plays with some subtle differences, but the most important thing is to get the bigger picture right.
This is not so much a trade as it is a signal not to trade. When the market lacks momentum, you will often find that it is “stuck” at a certain level. It’s like the level is acting as a peg or the market is going above and below the level – up and down like a yo-yo.
Usually this is a less than ideal trading environment and a good warning not to get into the noise. There is other valuable information here, however. When identifying a yo-yo, put warnings near the boundaries of the pattern. A breakout will likely result in a clean expansion, at least to the next PowerLevel.
Take a look at this trade in the table below:
The yo-yo often feels like a complete failure of the momentum as the market almost grinds to a halt at one level. There is another variant of this idea where the market jumps back and forth between two PowerLevels. Schematically it looks like this:
In practice it is sometimes really that clean! But more often there is noise and false outbursts. Here is a pretty typical example from a recent day of trading with the pong area highlighted.
Both yo-yo and pong are variations of a trading range. All of the skills and patterns of trading areas apply here, but they differ in how the levels define areas.
In general, on days when this type of compressed price movement occurs, you are likely to have some failed trades with trending.
The last trade we’ll look at today doesn’t need a chart to illustrate. It is much rarer than the others because it only occurs when the market is “surprised” by a sharp change in the market tone.
Simply put, if on a trending day you are outside of the most extreme PowerLevel for the session, there is a benefit to extending it until the end of that session. (This works just as well in intraday charts with PowerLevels derived from the day bar, or in daily charts with weekly levels.)
Of course, nothing works 100% of the time, so you still need to be careful and keep the proper trailing stops on trending trades. However, knowing that this tendency will support your trades rest assured that you are not taking away nervous early profits.
You have probably seen a lot of information in this blog post, but it makes sense to structure your trades using a handful of scenarios. Support and resistance are powerful concepts, but they are not easy to trade.
Additionally, there are many problems with cognitive prejudice that come into play when considering support and resistance. Even if there is no pattern, your brain will create patterns. Even if levels aren’t working, when you see them on a chart, you might think they are working. Many traders struggle because of using inappropriate and insignificant levels of support and resistance.
See what adding a handful of these trades and patterns can do to your trading results. Hope you will find as much value here as I have found over the years using levels like this in my own trading.