Friday, February 7, 2014

TechniTrader Weekly Stock Discussion for MetaStock: “Technical vs Fundamental Support Levels”

MetaStock® SPRS Series - Week 157 – February 7, 2014 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT

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 created the support level or if technical traders created that support level, the chartist can easily and quickly know who controls price and how price is most likely to behave at those levels and 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 price action, buy-on-the-dip price, bargain hunters moving in and disrupting sell short patterns, as well as the all important reversal patterns that are critical to recognize for both closing sell short positions and for entering stocks before they blast out of severely oversold conditions.
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 or patterns to a chart will not provide the reliability when fundamental support dominates over technical support.
Some fundamental support levels are obvious and easy to identify, such as all time highs, 52 week highs etc.  Other fundamental support levels can only be identified by using indicators and price action analysis in a relational approach that reveals Dark Pool and 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 these support levels do not hold up and that price often dips into these support levels 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 below.  

It is very common for fundamental support to not hold at the highs of that support or precisely at the 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, the trader is then able to adjust and modify their support analysis and 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.
For information on Technical Analysis go to:
Trade wisely,
Martha Stokes CMT
Chartered Market Technician
Member of Market Technicians Association
Master Rated Technical Analyst for Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader Stock Market Courses
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This Stock Discussion and Training Lesson is sponsored by
MetaStock® Partner

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