Tuesday, January 19, 2010

Price Magnets in the Stock Market

Note how volume has accumulated at two price areas so far today in the ES contract: the 1141 area and the 1144 area. This accumulation occurs when the buyers, who had been controlling the day's trade, finally are met by sellers who see opportunity in fading the price highs.

These volume bulge areas become price magnets in subsequent trading, acting as resistance to further gains and serving as support on valid upside breakout moves. How price treats those magnet levels in real time tells us a great deal as to whether fresh buying or selling sentiment can take control of the market.

In a strong market, of course, we should see bulges at progressively higher price levels, as price continually rejects these equilibrium points in search of new equilibria. When price cannot take out these price magnet levels, we often see a transition from a strong market to a range trade.