Posted on Thursday, March 23, 2017 at 12:51 PM
One of the more difficult issues traders face is choosing prices that are apt to be extremes or highs and lows over a given time frame. Pinpointing daily entry and exit levels, also known as support and resistance areas, requires some history of the market you are trading.
When charting, it is important to label prices where momentum kicks in. Areas where buyers take control of momentum often provide support when retested. Resistance levels form at prices sellers previously showed to force the market lower.
Extremes (highs or lows) made in the 1st hour of regular trading hours frequently provide reversals when retested. Generally, the high volume and most liquid time of the day is the first hour of the day session. This may explain why it we see reversals when early extremes are retested.
In the 10y note chart below, the prices highlighted in yellow show the first hour range. On 3/13, the high was made during the first hour. The high (resistance) for the following day was made when that extreme was tested. On Friday 3/17 the lower extreme was made in the first hour. When that extreme was tested on Monday, it was the low (support) for the day.
Extremes often form at old high volume prices as well. Note the green rectangle covering 3 consecutive sessions (3/10-3/14) of overlapping value areas. Value areas are the colored rectangles that include about 70% of the volume each day. When value areas overlap for consecutive sessions volume accumulates in a relatively tight range. High volume prices tend to provide support / resistance when revisited. This high-volume zone was retested on 3/15 and provided support for the day and it was also the onset of a trend higher. “Momentum begins and ends at high volume prices.” A market will typically continue in a direction until it runs into an old high volume area.
Extremes also regularly form when old very low volume prices are retested. On 3/15 the Federal Reserve Committee raised interest rates. The chart shows a spike higher that afternoon. The lowest dip after the rally is noted. That the same level provided support the very next day. When momentum accelerates, low-volume zones are left behind. Reversals often occur when such areas are retested.
The crude oil chart below shows a few more examples of support and resistance. Like the chart above when a 1st hour extreme was retested it provided resistance. On 3/20 the market found support when it retested an old very low volume price from 3/14. The high on 3/21 was made when the 3 sessions of overlapping value (3/15-17) was revisited. And on 3/23 the overnight high was made when a very low volume price from 3/21 was retested.
To pinpoint extremes, keep track of critical levels where momentum accelerated (very low volume prices). Note highs and lows made in the first hour the regular trading day. And when old very high volume prices (congestion areas) are retested expect support or resistance.
Senior Futures Instructor