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Technical analysis basics

  • Trend
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Support-resistance power criteria

Supports or resistances can differ greatly in power. Generally they express an imbalance between buyers and sellers and the greater this imbalance is, the more powerful the support/resistance will be (the more likely it is to hold). The main criteria that quantify a support or resistance power is the steep way price is leaving the support/resistance level and the length of the move and not necessarily how much time price stays at the level (consolidation). So in that sense, gaps are generally very strong support/ resistance zones because they express the maximum degree of steepness that a price can decline or rise from a chart area.

In CHK daily chart (below) notice the gap up and the big volume of that day. But this gap up is followed by a steep gap down which leaves almost all the buyers who bought on the gap up, trapped and unable of doing anything instead of closing their position and have a great loss. So next time price will revisit resistance at point 1 it will be hard to break it upwards because of the amount of trapped buyers and their strong desire to sell (the fear they felt propels them).

On the contrary, in BAC daily chart (below), we can see a period of consolidation which after the breakdown forms a resistance zone. During this consolidation many traders and investors had all the time they needed to think about and exit their long positions. Moreover those who trapped in the resistance zone had a chance to get out with small losses at point 1. So resistance here will not be as strong as in the chart of CHK. Presumably, there is a maximum loss limit above which some investors/traders prefer to risk more losses by not closing their position and waiting until the price revisits their entry point to get out break even.

The same logic is applied to GE and HPQ daily charts below. In HPQ chart the decline was much more steep than in GE, so much more buyers trapped and made the resistance stronger. Notice also the length of the decline in HPQ chart relative to the length in GE chart. The same rationale can be applied to a support zone, but in that case there will be mostly trapped short sellers and satisfied buyers who will buy again. 

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  • Possible breakdown in Greek stock exchange
  • Application of a simple strategy in EUR/USD
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  • Short term downtrend in Greek stock exchange
  • Possible upward movement in S&P 500

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