Charts SYSTEMS

[JLS]

snoot,

If you were to communicate to the vast majority of traders using only words and use the terms Support and Resistance, they would always think of specific price levels (or narrow price bands) at which major reversals have historically happened (usually many times at nearly the same narrow price range). Therefore, those prices are along horizontal lines as defined here:

http://en.wikipedia.org/wiki/Support_and_resistance

Some traders will refer to trend lines, which are usually anything but horizontal, as providing support and resistance. I don't have a big argument with that because they appear to do that. But that's only in appearance, and is not causal. I'm emphasizing that last sentence because it is very important to understand the difference between that which appears to cause a reversal (such as a trend line) and that which actually does cause the reversal, which are the SR levels, which by definition are along horizontal lines because those price levels repeatedly had the same effect as can be verified in the price history.

Said differently, sloping forks and channels might be pretty but they are not the root cause of price reversals. The root cause of reversals, when there is history (which is the vast majority of the time), are the previous reversals that happened at the same price. Connecting those historical events with lines creates horizontal lines known as SR lines. For those few times where there is no history, some traders like to extend their channels or trend lines (and I don't have a particular problem with that) or they like to use Fib lines (which, guess what, are horizontal lines). I prefer to look for specific candlestick reversal patterns instead, or I'll use a fast tracking channel such as a Donchian channel.

By "clusters of little dots" you must be referring to the SR density plot. Yes, there is a dot at the end of each horizontal line, and I put them there to make the chart a little more readable. But you wouldn't know that because you haven't seen a chart without those little dots. There is nothing subjective about that SR information as it is an exact statistical representation of all closing prices over time, in this case 13 months. You might note that the candlestick chart that is right next to the SR chart does not cover 13 months. The amount of time represented in each chart can be chosen over any range and they are independent. I have other SR charts in which I routinely calculate SR levels going back 3-4 years. It is very useful to have that information in a compact form right next to a candlestick chart that may only cover a few weeks of time.

What the SR chart shows very clearly is that closing prices spend most of their time very near SR levels. Why? Because by definition that's what SR levels are. So it doesn't take a rocket scientist to say that once price breaks through one level, it will usually rather quickly get to the next level and rest there for a while or it will fall back and keep testing the same level in the opposite manner -- support becomes resistance, resistance becomes support.

I'm not going to go around and around with you about SR levels, as you did in your last paragraph. I'm just saying that they are real and very useful, they can be easily calculated, they describe history in a nut shell, and they show that history repeats, and you don't have to scratch your head and search for them in the grass as you do your forks. And that fork of yours? What fork? It's only got a middle tine. What good is it if price can't find the other tines? That's not a fork. It's one chop stick. If you are desperate for a pattern, put a wedge on that multi-month trading range and you'll have multiple tags on both sides, so it's justified and its boundaries are useful, probably very useful. And what would happen if price broke lower out of that wedge? If it's a strong breakout, odds are pretty good that price would drop to the next lowest SR line and camp there for a while. Odds would be very low that price would drop 80 points, which represents several SR levels, to the bottom tine of your 'fork'. After a drop in price, it is much more logical to evaluate the market as price drops to each lower support level, and it is important to know where those levels are and their strength.

If you want software that calculates SR levels for you, you can download a free program that does that from Bulkowski. You will get lots of horizontal SR lines but the display of them basically sucks as it is just a 2-dimensional calculation and you will have overlapping lines and you wont know how many overlapping lines so you wont be able to judge their strength. That make his method pretty much worthless.