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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. 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. 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.
