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The Traders Wheel
 1/18/99 by Alan Farley

More Market Numbers: Down Town

Congestion zones below key market numbers may signal bad news. Major trend changes occur more often near decimal numbers (10, 20, 30, 40, etc.) than any other prices. These reversals first trumpet their presence after a short-term violation of the market number. Price falls back and turns sideways into a tight consolidation zone. The rangebound bars print a topping pattern that then fails on high volume.

When price drops sharply off whole market numbers, the trader needs to step back and study the next longest trend. Significant reversals at these resistance points may not retrace for months or years. The trend change dynamics reflect the unique crowd that holds positions through each round number series. As they attempt to take profits, the next number group "refuses" to buy their stock. The trapped longs then trigger a selloff that ends the trend.

Market numbers can provide strong support in down trends. One dependable scalping trade buys the first failure of a market number (unless it gaps to get there). Caution is advised, however: momentum for the first move back above a market number dies quickly.

Insider greed and knowledge makes this trade possible. Market makers and specialists know stops concentrate just below market numbers. They push price through these points to gather the triggered sell orders. Paradoxically, the volume surge induced by this violation quickly alleviates selling pressure, causing the market to rebound above the round number.

Knowledge of market numbers evokes interesting short sale strategies. For example, in an up trend, aggressive traders can sell short on the first strike of the number, if certain conditions are also met:

  1. 1. No congestion area has formed just below this key resistance, i.e. the stock reaches the number at the end of an extended rally. For example, don’t short 30 when a stock has pushed up out of a base at 28 or 29.
  2. 2. Technical indicators show an overbought condition and rally termination. Use cross-verification such as RSI and Fibonacci retracements to increase safety.

A second short sale enters the final breakdown of a market number. Falls from these numbers can be sharp and nasty, especially when cross-verification confirms the break pierces another key form of support, such as a moving average. In fact, market numbers routinely appear at major moving averages, Bollinger Band extremes and key retracement percentages. And watch closely for those rare times when multiple indicators intersect at round numbers. Trades initiated from these points can be very rewarding.

asndsht.gif (8540 bytes) Use cross-verification with market numbers to locate effective entries. As ASND tried to recover from its 1997 plunge, it printed a month long bear rally within a simple parallel price channel. The top of the channel corresponded perfectly with the round number of 60. Note how the reversal day extended through the common 50% Fibonacci retracement to print the market number before failing.

 

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

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