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Established in 1994 by Greg Capra, well-known technical analyst and successful trader, Pristine has successfully taught thousands of people to consistently profit from the markets for over 20 years. Greg and Pristine have appeared on CNBC, Barron’s, Investors Business Daily, International... More
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Trading Tools & Tactics - Reading the Mind of the Market
  • Bringing Common Sense To Trading-All Of This Hocus-Pocus Analysis Is Insane! So, What's The Answer? 0 comments
    Oct 1, 2012 5:52 PM | about stocks: FB, GOOG

    Bringing Common Sense To Trading-All Of This Hocus-Pocus Analysis Is Insane! So, What's The Answer?

    After reading this I believe that you will have what is referred to as a Ha-Ha or Light- Bulb moment. The basis of this concept isn't a new revolutionary type of technical analysis, but it is a powerful common sense approach to understand the interaction between buyers and sellers. Find someone else teaching the same - and you'll have found a formal Pristine student.

    Frankly, there isn't anything new or revolutionary when it comes to technical analysis. However, there are different ways of interpreting the same raw data that we all use. Most do this with a hodge-podge of indicators. Some even make a business out of selling you their proprietary indicators or indicator based system that will tell you what to do and when to do it.

    Knowing what to do and when to do it sounds great and why so many buy into these marketing indicator schemes. Maybe you remember or bought the once popular red light - green light trading system that many paid thousands for in the mid-2000 period. If you're interesting in a long-term approach to technical investing or trading, the history of the red light - green light indicator approach (gone) and others like it isn't it.

    The use of indicators or indicator systems attracts virtually everyone that becomes interested in trading the markets. I was no different when I started and tried many indicators and wrote a few of my own. The idea of removing the guess work and the uncertainty is attractive. It is also a powerful way of motivating those interested to buy into their marketing. Been there?

    Here's the concept I want to share with you....... There are buyers at prior price support (a demand area) and sellers at prior price resistance (a supply area). If you're thinking; I knew that already, that's it? You don't realize what a power concept this is.

    Let me explain.

    Virtually all price indicators/oscillators (there are hundreds) attempt to define when prices have moved too far and will reverse, right? Sure, but it doesn't work except in hindsight.

    These indicators have absolutely nothing to do with prices reversing. If you doubt it, think about why does what becomes overbought or oversold either stays that way or becomes more so without returning to the other extreme so often? It's not that you're using the wrong indicator or settings either. That's thing will keep you in search of the Holy Grail and the next indicator.

    Next there are technical tools like Fibonacci Retracements, Gann Lines, Moving Averages, Elliot Waves, Andrews Pitchforks, Bollinger Bands, Regression lines, Median Lines, Trendlines and they go on and on. All of them are supposed to locate the area where prices will find support or resistance.

    All of this hocus-pocus analysis is insane! So, what's the answer?

    An in-depth understanding of price support and resistance pivot points or consolidations as reference points are where you need to focus. This is where buyers and sellers interacted in the past and will likely do so again. Once you have a reference point, wait for a price pattern signaling slowing momentum and reversal.

    At Pristine, we define a Support Pivot as a bar or candle having at least two higher low bars to its right and left. A Resistance Pivot is a bar or candle having at least two lower high bars to its right and left; simple.

    The trend of prices, the arrangement of the candles, changing ranges and volume are some of the other concepts to consider that increase the odds of follow through, but that's for another lesson. As far as where prices are likely to stall, it's the basics you need to follow. There are buyers at prior price support (demand) and sellers at prior price resistance (supply).

    Let's look at a couple of chart examples.

    As Google (NASDAQ:GOOG) moved lower on the left side of the chart, it formed a Resistance Pivot. As you can see, sellers came in at the same location. You didn't need an indicator to guide you where sellers would be, did you? You only needed to look at the chart for a pivot high. Once the trend was violated, look for buyers (demand) to overcome sellers (supply) at a Support Pivot.

    As prices move higher in an uptrend, the concept of what was resistance becomes support applies. However, in the strongest trends prices will not pull back to what was resistance. I'm sure you've seen that in the past. At these times, don't chase. Wait for a Support Pivot to form. Once it does, you have a new or created reference point of support where buyers will step in again. Reversal candles are you confirmation at those points.

    In the chart of Facebook (NASDAQ:FB), prices moved up from a low pivot point and there was no clear resistance area to the left. However, once a Resistance pivot formed there was a clear point where sellers (supply) overcame buyers (demand) and that would likely happen again. Once FB broke lower many will look for a retracement to sell, which is fine. However, when supply is overwhelming demand - prices cannot retrace that much. Don't chase out of fear of missing the move, even though that may happen. Wait for a Resistance Pivot to form. Once it does, use that reference point and your Candle Analysis to tell when to act.

    In the chart of the New Zealand Dollar versus the U.S. Dollar (NZD.USD.FXB) a climactic move lower occurred. This created a Pristine Price Void above and once a pivot low formed we had a reference point where buyers (demand) would show up again. However, we cannot know for sure if that low will hold, and we don't want buy in such a strong downtrend without confirmation. Rather, we want to wait to see if a reversal will form in the same area. If it does, we have that confirmation on the retest and a strong buy signal.

    I hope this Chart of the Week has provided you with the Light bulb moment I promised.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Themes: technical analysis, trends, charts Stocks: FB, GOOG
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