Friday, December 19, 2014

121914 MSWeekly - Technical vs Fundamental Support Levels

One of the most wonderful aspects of studying charts and learning to read them properly is that the technical trader has the viewpoint of all the traders both professional and retail, who are employing technical patterns for their buying or selling decisions. In addition, anyone who is able to interpret and understand chart analysis also is able to see what the fundamentalists are doing. Fundamentalists who do not use Technical Analysis have many blind spots in their analysis which can be problematic.
There is a distinct difference between how price reacts to fundamental support, and how price behaves at technical support levels. By understanding whether fundamentalists or technical traders created a support level, the chartist can easily and quickly know who controls price and how price is most likely to behave at those levels in the near term.
This is a particularly important skill to develop for downtrending markets. Identifying the difference between fundamental support levels and technical support levels will help a trader prepare for “Buy To Cover” BTC price action and “Buy On The Dip” price. Bargain hunters can move in and disrupt sell short patterns. Also there are reversal patterns that are critical to recognize for closing sell short positions, and for entering stocks before they blast out of severely oversold conditions.
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Many technical traders make the mistake of assuming that all support levels are driven by technical patterns, and fail to consider the fundamentalist dominance in many price areas.  Simply applying Fibonacci, Gann, regression, speed, or other lines and patterns to a chart will not provide the reliability when fundamental support dominates over technical support.
Some fundamental support levels are obviously easy to identify such as all time highs and 52 week highs. Other fundamental support levels can only be identified by using indicators and price action analysis, in a relational approach that reveals Dark Pool as well as other large lot activity. Contrary to popular myth among technical traders, support levels are not precisely distanced. Support levels can and do occur at inconsistent percentages rather than precise percentage ranges.  
Often times technical traders will set up a series of levels for support, only to find they do not hold up and that price often dips into them during corrections or retracements. This can cause serious problems with stop losses, especially percentage style stop losses that are frequently hit due to fundamental buying or selling patterns not recognized by the technical trader. An example of such price action dropping through technical support levels is shown on the chart example below.  
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It is very common for fundamental support to not hold precisely at the highs or lows of that support, however technical support levels tend to be very precise.
When a technical trader recognizes the influence of fundamental buyers and sellers on price action and where these levels are developing, they are then able to modify their support analysis. This allows them to place stop losses at appropriate levels that will not be at risk of whipsaw action, which takes out many retail trader stop losses.
Learning to read charts properly involves far more than just reading a book on technical patterns or watching a webinar on various technical theories. To be an expert trader you must understand the intrinsic dynamics of the fundamentalists and the technical traders, where and why they buy, what orders they use, their share lot sizes, and how this creates support levels.
Trade wisely,
Martha Stokes CMT

Instructor & Developer of TechniTrader Stock and Option Courses
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