Thursday, March 25, 2010

A lot of the technical work I do in developing our stock market forecasts is based on rigorous computer analysis of the markets.  Everything for me is not hard core science though, and this is especially true when it comes to support and resistance computations for the website.  I have the unique experience of having followed the S&P 500 every day for close to 20 years.  In this time I have gotten to know this market like it is a brother to me.  The S&P 500, SPYders, Emini S&Ps and other instruments that track this market have a very unique set of characteristics that are unlike any other market.  Knowing these idiosyncrasies has helped me to make amazingly accurate weekly high and low forecasts. Tooting my own horn?  Yes!  Not something I typically do, but if I am to show you a bit about how I do this, I need you to first understand I am not making this up.  The success is based on published numbers in the member’s area of our website.

These price levels, or “key” level computations are used by our members to place long trades at or near the weekly lows, and short trades at or near the weekly highs. They can be used pretty much as a standalone tool, or in conjunction with other trading tools or technical indicators.

How do I do it?  I am not entirely sure, to be honest.  It falls into an area where science (probably operating in one area of my brain) fades into art (that ephemeral area over on the other side).  Typically, I always know what the highs and lows are for the year, month, week and previous couple days are.  Highs and lows in the market are very emotional points people will respond to when the market nears them.  If approaching, these areas become a magnet.  Once hit, they become a key area that often results in a market turn around.  For example, this week (9/17/08) I called the 1202 level as a key area (on the Emini S&P contracts) as being a likely low area. I called this area simply because I knew it was the low for the year that was made previously back on July 15th.  When the market opened through this area on 9/16, it was a buy (I love it when the market gaps through my buy area and gives me extra points).  The market then rallied to as high as the 1220 area; as much as 53 points.

Let’s take a look at the current situation:

I have highlighted and numbered the various key areas from 1-7.  As you can see, just this morning we tested area #5 and bounced from it as we play with new lows going back to October of 2005.

The market typically won’t cover massive amounts of ground all at once.  It has to aggravate its participants by moving in waves. A lot could be said about the economics of this, but it is not necessary to understand this in order to compute support and resistance areas.  The market will very often turn where it has in the past.  It is just that simple.

On the upside, area 7 becomes key at this time.  This is around the 1200 level.  If the market were to make its way up to this area, and reacted (by turning lower abruptly at that level), we would want to be short.

Because there is a gap on the chart between area 6 and 7,  the 1200 level does not hold as much respect as a higher level, so in the event the market was playing with this area going up, it could very likely want to get up closer to the area around the close on 9/16.  Very often, on a gap like this, the real area where the market will turn is not at the high point of the close on 9/16.  Instead, the market will come within the low of the last 50 minutes or so on 9/16.  This would be around the 1211 area.  This is why I will often state key levels, not as a specific number, but as a range (as in the “1208-1212 area”).

This exact same logic would apply to the area around highlighted areas 3 and 4 on the graph. Because areas 3 and 4 are a long ways away from the current level, I would not likely make note of them in any given week. The thinking here is related to what constitutes a normal range for the week (which lately is ridiculously high).  Since the trend (and our forecast) is down, I just don’t expect to see that area as relevant in a 5 day trading period.

Areas 1 and 2 are very important.  Area 1 was a very large gap from the previous day.  Therefore, a lot of people were financially damaged in this region on the chart.  It will hold weight.  I would not likely give area 1 a 100% value in my interpretation though, because, after the market came down and  played with the area that is about 50 minutes (as we discussed above) from the previous day’s close on 9/8 and rallied, it gave people an opportunity to adjust at or around area 2.   These two areas are only 8 points apart, so I would be inclined to look for a reaction somewhere just above point two.

We have covered some excellent ways to identify future turning points in the S&P 500 and related markets. Yes, there is a bit of an art to it, but, give some time and persistence, you will learn these areas as described get played over and over and over again.  Computing support and resistance can be learned by anyone willing to take the time to learn.  In this example, we looked at a 10 minute chart so we could see intraday levels that are important.  I believe forecasting highs and lows without the aid of intraday charts would be much more difficult if not for this fact.  The principles will hold for just about any time frame in this market.

Rob Mitchell is a financial researcher, consultant and money manager specializing in cycles in the S&P 500 and other stock indexes.  He can be reached through www.EminiForecaster.com where he is a managing partner.