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The Traders Wheel
1/11/99 by Alan Farley

Market Numbers: The Rule of 10s

Support/resistance has many faces. Trendlines, prior price extremes and hidden Fibonacci levels all swing market momentum back and forth. Another lesser-known set of numbers also provides excellent support/resistance feedback and unique trading properties. This price series bases off the common decimal system of 10 and tenths. And you need look no further than your fingers and toes to understand their logic.

Markets consistently shape patterns involving whole number logic. In fact, unique crowds tend to trade within each increment of $10 in valuation. An easy way to understand price volatility at whole number levels ($10, $20, $30, $40, etc) is to view it as an exchange of positions from one crowd to the next. As prices slowly evolve from resistance to support (or vice-versa), predictable swing elements appear. Traders can create successful entry strategies that capitalize on these dependable characteristics.

As prices approach round levels, classic congestion patterns develop with upper (or lower) boundaries limited by the market number. The character of the prior trend slowly evolves into a period of quiet position squaring, frequent testing and small retracements. This area of consolidation represents an important activity zone for the swing trader. Fade strength and buy weakness until broader conditions tell a different story.

Measure the reduction in price volatility to locate the climax for this redistribution process. Classic signs include a sharp drop in price rate of change and the appearance of narrow range price bars. Stay alert in this quiet zone. The new trend can emerge very quickly.

This narrowing of price movement may be hidden by wide price swings that fool the trader’s eye. Use more sophisticated technical indicators to uncover a strong signal hidden beneath this price "noise". These measurements take off as the stock emerges past resistance, opening the door for the breakout trader to follow the emerging trend.

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Once a market number becomes support, expect a sharp price thrust away from that level. This tendency triggers a profitable entry point for the short-term trader. BBY's 20% one-week rise demonstrates the potential for this price surge. Fortunately, pullbacks to its market numbers allowed several second chance entries. Also note how this stock used the halfway point between round numbers as another key pivot.
Article contributed by The HARD Right Edge, which presents highly original tutorials, strategies and resources on multi-trend technical analysis and and short term trading. Article reprinted here with permission, which presents highly original tutorials, strategies and resources on multi-trend technical analysis and and short term trading. Article reprinted here with permission.
 
 

 

 
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Last modified: April 02, 2001

Published By Tulips and Bears LLC