Friday, September 11, 2009

Tracking the Emergence of Resistance and Support

If you click on the Market Delta chart above, you'll see clearly within each bar how many contracts were traded at the market bid (first number) versus offer (second number). Equally important, you can see clearly when and where large orders are transacted.

What you'll commonly see (and that is visible in the chart above) is that you'll see the market move in one direction (with volume dominantly at the offer or bid) until large orders hit the market in the opposite direction. That sets up a two-sided trade in which the market reaches a point of equilibrium between buyers and sellers. It is just such an equilibrium that, over time, forms what we see later on charts as resistance and support.

Note how large orders came into the market around 1039 this morning, creating a two-sided trade (large volume at both bid and offer) and an accumulation of volume around that price. That sets us up for that area to serve as important resistance going into the market open--an important reference point by which we can judge market action during early trade.

Rejection of that level to the upside in early trade would continue the market' s impressive bull run; failure to take out that level in early trade would put us in range mode and target the day's VWAP as a short-term intraday target.

Seeing support and resistance as processes, not static "things", helps us define short-term points for initiating trades, taking profits, and watching for breakouts.