Important Prices Are Almost Always Tested
As you will see in a moment Emini Futures prices tend to stop and reverse several times at or around the same price level. Why is that? What is it that makes a particular price important? Is it a secret formula discovered by men with names like Fibonacci, Bollinger, or Wilder? Perhaps...
Or, did they discover something more about the nature of man vs. the nature of numbers?
I've worked with formulas, ancient alchemy, and even burned a little sage in search of the answer. Right or wrong, here's my opinion...
After the build up this may sound a little mundane. We know a price is important because it gets "tested". Can we know it's important before the test? hmmmm...
It does seem a bit odd that an imaginary spot on the chart can hold prices down or prop them up. Those spots are not imaginary, they represent the collective valuation of every trader currently in the market. As we test that price over a period of time we can "connect the dots" and create lines. That's right, good ol' Support and Resistance Lines.
Let's take a look at how they are created.
Support is created at a point where "buying pressure" exceeds selling pressure and declining prices are stopped. Sellers drive the price down until buyers step in which turns price back up creating a reversal point and potentially a rally, relative to the time frame being traded.
Price will continue to climb until it reaches a point (price) where "selling pressure" exceeds buying pressure and the rally grinds to a halt. Not only will it stop climbing, unless a second wave of buyers step in, price will begin to fall. The question is how far?
Buyers who missed out earlier at the cheaper price are anxiously awaiting another buying opportunity. The next time price falls to that spot (support) they will see it as a bargain, dive in and run it back up again. Eventually price falls to the support area and there is more selling pressure than buying pressure. Price then continues to fall until there is enough buying pressure to halt the decline. If you want to know where that spot is likely to be, just look left. The market has a most amazing memory.
A resistance level is created at a point where "selling pressure" exceeds buying pressure. Price rises to a certain point and once enough traders believe that price or "value" has peaked they will begin to sell, which in turn causes the market to reverse and fall in price. This is how the market works. Day in and day out. Over, and over, and over again.
What happens when price breaks out to new highs? The collective mind will establish a "value" and the rally will halt. Chances are quite good that the price which was tested numerous times as resistance, will now be tested as support.
(ESU2) Daily Chart S&P 500 Emini Futures
As you can see on the Daily Chart above for the entire month of July buyers are eager to buy @ 1320 and just as quick to sell at 1376. How long will this last? Until buying pressure exceeds selling pressure or vice versa. It really is that simple.
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