I wish I could tell you there was some magic formula for determining the answer but, there just isn’t.
However there ARE some things we can do and use to help us with these kinds of decisions.

One of the most effective assists we can put in our toolbox is the use of Resistance and Support ranges as opposed to finite lines defined by a single specific number.

As most of you are aware, my identification of Resistance and Support is most frequently comprised of a range. For example, look at the May Wheat write up in today’s edition. I identified my focus as a range between 3.70 ¾ and 3.71 ¾. Most R&S analysts looking at this chart would, under their rules, have to draw 2 separate lines … one at .70 ¾ and one at 71 ¾.

This creates a chart almost impossible to read and interpret in my opinion. It also presupposes a precision that I do not believe actually exists in the market and therefore flaws the chartwork from the “git go”. For the “precision” analyst it also clouds the management. If you go long on a bounce off 70 ¾ what do you do at the next resistance overhead at 71/3/4? If you tell me you ignore it then I say you are fudging your findings as an R&S technician. If you say you see and respect it then let me see that reflected in your management … do you roll to B/E there?

These are the kinds of conundrums that got me started thinking in terms of ranges instead of trying to be so narrow as to limit myself and the market to “one price” levels of Resistance and Support.

In the case of Wheat, we recognize the range which helps us with the decision in answering Tom’s question.

Now I can say that 3.71 ¾ is THEE answer to the “when is the resistance broken” so I can go long question. I can say that a break of 3.70 ¾ is the answer to the “when is support broken” so I can go short question. Now I can say that the market holding on at 70 ¾ is persuasive evidence the support is holding so I can get long … etc, etc, etc.

As Wheat tests 3/70 ¾ and turns back up and it rises above 3.71 ¾ I have a pretty powerful clearance to go forward with my long trade. As wheat tests 3.71 ¾ and it holds, the market now drops to and thru 3.70 ¾, I likewise have a pretty good confirmation that the resistance held and I can proceed with my short trade with some confidence.

No matter what decision I’m looking for, the existence of the Resistance and Support range as opposed to the finite number gives me greater flexibility, is much closer to the actual dynamic of price fluctuation within the market and eases the burden of making my management decisions on entry, stops and targets and how best to arrive at them and array them for the best possible solution.

Another little trick you can use is to look market by market how much they over run points of Support and Resistance. Huh? What does that mean, you ask.

Go look at the March Canadian Dollar chart. Draw a line across the page at 7580. Now count the number of times a reversal occurred at or near that line … I count 18 of them with 20 points each side of the line. I count 14 of them within 10 points either side and 11 within 5 points. No matter what any analyst says I KNOW every one of the trading decisions that made this stuff happen was made off the 7580 line … some traders are early, anticipating, some are late, unsure of their actions hanging on longer than they should … but every single one of them made their ultimate trading decision off the 7580 line.

I can use this knowledge to help me. From this data I know 61% of the time the break or hold of R&S occurred within + or – 5 points. 77% of the time within 10.

Now, when I trade a finite line in the CD I know my odds are helped if I let at least 5 points either side go.

“Can you dig it, baby?” What group sang the song from which I stole this lyric? Nice prize awaits the first one. The list of brokers I’ve been preparing will be published tomorrow. We will send out an email with a link to the relevant page. Please re-read last week’s article on choosing a broker…and then check out the list!

-Tom Loge, CTA.