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In this article I am indebted to a reader and trader who kindly sent me some of his own work. The concept of support and resistance is basic to any technical trader, even if it is as straightforward as a simple trend line. Over this series of articles I have written a lot about support and resistance. Traders who follow the work of WD Gann and David Bowden refer to 3 ‘dimensions’ of resistance and support levels. I have covered all of these in some detail.
The first dimension is the dimension of price. Here we use percentages of high and low prices, as well as of price ranges, to establish levels where prices may reverse. The second dimension is time. Here we look for dates where changes in trend may be expected. And the third dimension covers the geometric or Gann angles. If you think back to your High School Maths, you will remember drawing X and Y axes for graphs. And if you wanted to graph a 3-dimensional object you would also draw a Z axis. This is exactly what Gann was doing with stock charts.
In the mechanical trading system which he taught to his students, Gann laid particular stress on 2 elements of price support and resistance. These were double (and triple) tops and bottoms, and 50% retracements. And anyone who has studied David Bowden’s Smarter Starter Pack is familiar with 50% retracements. This is the ‘Estimated Point C’ that you calculate for every ABC trade.
Chart 1 – Recent Double and Triple Tops and Bottoms
click to enlarge
While this market has clearly been range-bound, look closely at the recent price action. On 31 August a double top formed. If you review the recent articles in Issue 332 and 333, you can see that this showed up in our time counts both in calendar days and trading days. If you check out Chart 2 you can see that it also hit a 1 x 1 calendar day angle from the 3 June 2008 all-time high.
Chart 2 – Angle at the 31 August High
click to enlarge
So, thinking back to our earlier discussion, on 31 August there was harmony in all 3 dimensions – Price (double top), Time, (calendar and trading day counts) and Angles. This would be a great place to look for a short entry.
Prices ran down to a low on 28 September. Note from Chart 1 that this was sitting right on the 50% retracement level of the range from 27 March to 9 July. If you count the days, the range from the 9 July low to the 31 August high was 53 days, and the range from the 31 August high to the 28 September low was 28 days – almost exactly a 50% retracement in time. This would be a great place to look for a long entry.
Then on 22 October the market reached the previous levels of 27 March and 31 August and formed a triple top, before running down to make a double bottom, again on the 50% retracement level, on 2 November. You can see from Issue 333 that this was 360 trading days from the all-time high.
Combining perspectives in 3 dimensions like this will enable you to get a much stronger view of what the market is doing.
Knowledge is Power!
Tim Walker
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