How Long are Levels Valid?
A Bandit subscriber recently asked me about levels and how long they should be watched. This was a great question, so I wanted to be sure to share this exchange with you.
Question:
Jeff, I’m new to trading (since Christmas). I’m wondering how important long term resistance levels are. I suppose it depends really on the market conditions. A skittish market probably respects them more. This market seems to be plowing on through them regardless. The NASDAQ now, is free and clear of them with its breaking through the eleven year high, unless it goes down again.
The reason I am asking is that I’m sticking to a 4 1/2 month chart and ignoring any information older than that. It simplifies things and I wonder how far back people really remember. I also am thinking the older the resistance/support level, the less significant it is. Do you think I will be ignoring less recent history at my peril? I also find that the more information I bombard myself with the less clarity I have.
Thanks
Answer:
Great question and this really deserves its own blog post so I’m glad you asked. To answer you though, here’s my take on it.
I’ll begin by saying as long as a level is being respected, it’s worth taking note of. That pertains to an individual stock which keeps knocking on the door over the past few weeks, or to an index chart like the NAZ which has just recently pushed through multi-year resistance.
So, they’re worth taking note of. As far as how important they are, let’s consider the psychology at work here, which is what it really comes down to.
Technical levels are representations of buyers and sellers, which often times base their decisions on emotions. The older the level, the less emotional significance I’d attach to it. More recent levels are fresher in terms of emotion, and therefore tend to get respected to a greater degree.
I’d say anything inside 18 months or so is game, whereas I place lower significance on multi-year levels. They may be noticed by technicians, but anyone who has held for 11yrs in the case of the NAZ isn’t likely to bail out now that they’ve finally gotten their money back – I think they’re the “invested” crowd who never truly intends to sell.
What do you guys think? What would you tell this new trader?
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Jeff White
Producer of The Bandit Broadcast
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Mark | Feb 29, 2012 | Reply
A thought or two, after a glass of wine (or two) on an evening of relaxing with my hobby (trading) after a hard day’s work (doctoring)
Trading is sexy!
Why?
It takes a whole person to have the confidence to trade and the vitality to trade well and go for it and succeed. A whole person is a sexual being. One who is confident in who they are, successful, vital, without inhibition and happy. It takes those aspects to be successful in any walk of life. A vital, whole person, has a sex drive that propels them to excitement and to conquer. Caution seems to be an essential ingredient also when trading. Where does that come from???? The vitality is the drive. Maybe the caution is secondary, to the drive to succeed.
What about the investor? How do they function? What is their drive? They are the thoughtful type, who like to pontificate and consider, in an insecure way, before tentative action. Thought and intellectuality are abhorrent to me, I find such people inhibitory and restrictive. They often have a superior air which is oppressive. A phoney defence mechanism/façade to put down those with real vitality and potential. Peacock feathers to cover up their ineffectiveness and lack of vitality.
So I suppose like anything else. A successful trader has vitality and real prowess and competence in every walk of life, which comes from being a whole human being. And a whole human being is both objectively and subjectively sexy, and trading would be an appealing outlet.
Jeff, don’t print this on your site if you don’t think it is appropriate. Maybe it has some value. I don’t know. Maybe there are some useful elements for discussion.
Mark | Mar 1, 2012 | Reply
Makes less sense this morning. I was thinking about investors/investment advisors in the media, rather than private investors. Perhaps should be removed.
Manesh Samtani | Mar 1, 2012 | Reply
I have also struggled with this for some time, never really sure how far back to go, and always wondering how far past a support or resistance it has to go for it to be considered broken. I often try to make trades based on support and resistance, but as soon as I’ve entered a position on a breakout, it turns right back around again. The same questions are coming up watching the Dow. Yesterday it clearly closed above 13,000, but today it’s back below. Is 13,000 broken? Or is it not? I appreciate your comments on this also.
Anonymous | Mar 1, 2012 | Reply
Hello Manesh, appreciate your comments here.
The simple answer is that if price moves through the level, it’s broken. That doesn’t mean it will necessarily hold, but it does mean the hurdle has been cleared. The bigger the level, the more testing it may involve (like S&P 1370 lately).
I think what’s important is to detect these levels, monitor how they are respected, and trade accordingly. There are no guarantees in trading.
Also take note of whether breakouts have been working well lately or not, as that can really help you gauge whether you can trust them. Recently, we’ve made incremental new highs only to simply move sideways, so dips have been bought with more aggression than breakouts. Understanding the kind of conditions we’re in is a critical element of success in trading, which is a big focal point in our courses over at TheStockBanditUniversity.com.
Thanks again for stopping by!
Mark | Mar 3, 2012 | Reply
The more I get into this, the more I think you are right when you say trading is a “feel thing”. Respecting/not respecting levels seems to depend on sentiment, which can be gauged from feel in response to the chart (volume, momentum, patterns etc.). If it is a wimpy stock, or a wimpy market, the stock is going to stop at resistance. The more wimpy, the further back it will look for an excuse to stop. If the stock has people’s attention, and the market is on the move, nothing is going to get in its way. The further away the resistance line, the less importance it has, as you say. I think I will stick with the 4 ½ month chart, and focus instead on trying to pick the stocks that are moving in a dedicated way. If only for the sake of simplicity and reducing the information clutter. I think the answer depends on the trading style and the type of stocks being traded. At the moment I’m trying to develop a successful trading strategy for penny stocks, and they are more short term, flash in the pan things, so I don’t need to look that far back, as the action is more in the moment. The penny stock trading seems to provide the excitement of scalping on a swing trading time scale. The plan seems to be at breakeven at the moment, but if people start jumping on the penny stock band wagon…I’ll be ready!….I think!
Mark | Mar 3, 2012 | Reply
The more I get into this, the more I think you are right when you say trading is a “feel thing”. Respecting/not respecting levels seems to depend on sentiment, which can be gauged from feel in response to the chart (volume, momentum, patterns etc.). If it is a wimpy stock, or a wimpy market, the stock is going to stop at resistance. The more wimpy, the further back it will look for an excuse to stop. If the stock has people’s attention, and the market is on the move, nothing is going to get in its way. The further away the resistance line, the less importance it has, as you say. I think I will stick with the 4 ½ month chart, and focus instead on trying to pick the stocks that are moving in a dedicated way. If only for the sake of simplicity and reducing the information clutter. I think the answer depends on the trading style and the type of stocks being traded. At the moment I’m trying to develop a successful trading strategy for penny stocks, and they are more short term, flash in the pan things, so I don’t need to look that far back, as the action is more in the moment. The penny stock trading seems to provide the excitement of scalping on a swing trading time scale. The plan seems to be at breakeven at the moment, but if people start jumping on the penny stock band wagon…I’ll be ready!….I think!
Anonymous | Mar 4, 2012 | Reply
Good work Mark coming up with a system that’s suitable to you…take what you can from others (me or anyone else), apply the principles which are fitting for your style, and do what works best for you. That is the aim!