When I make my best decisions it's usually when I consider four independent forms of analysis: overbought / oversold conditions, the trend, specific directional signals, and support / resistance. I prefer to use volatility oriented arithmetic when measuring all four areas. This blog is about volatility-based support and resistance analysis (VBSR).
Note: VBSR is a somewhat different form of support and resistance than most are accustomed to. I use my own volatility bands (N bands), along with support and resistance levels derived from them (SR lines). You may wish to take a moment and review this instructional chart that explains the application of these technical measurements. See VBSR QuickStart chart
Recently
On July 1st temporary market support was reached when the S&P 500 fell to 1014. The twin charts below show a weekly and a daily plot of the S&P. On the right you can see that the intraday low on July 1st came very close to the lower N band. The resistance and support effect of the N band begins at a point of one ATR(40) from the band. Concurrently the weekly chart shows that the index found support at the SR 5 line.
Looking Forward
Today it's a cloudier picture. Since the market turn on July 1 most S&P sectors have risen to points between intermediate term support and resistance. They are also moderately overbought, but that's a different area of analysis.
One helpful thing we can do at this point is to determine the sector(s) with the most unobstructed room for continuation. Analysis of the relative distance to zones of support and resistance can help to forecast the sector(s) most likely to outperform.
The chart above is a 3 day chart the XLK, the Technology Select Sector SPDR fund. The upper N band is several units of ATR from the current price level, posing no real threat for the next five or six weeks. Beneath it are two pairs of SR lines in tight proximity. This gives the XLK a more solid floor of support within that same five to six weeks.
Looking at the weekly XLK chart below we can see how the SR 3 and SR 4 lines confirm the same potential resistance zone as the 3 day chart. It's also visible how the XLK found weekly support at the SR 5 line on July 1st. Most of the sectors simultaneously experienced some similar support signal that week. The current level of the SR 5 and SR 6 pair illustrate how a probable trading range has setup. While most of the S&P 500 sectors have formed probable trading ranges, the difference here is that the range for the XLK seems to be wider than most of the other sectors. The Consumer Discretionary sector (XLY) seems to be following as a close second place.
For a different outlook the 3 day chart below of the Materials sector (XLB) has resistance closing in quite soon. The upper N band is only 1.3 units of ATR(40) from beginning to deliver resistance. The band's resistance effect begins when the band is one unit of ATR(40) from the high. Depending on price movement that could occur within a couple of weeks.
In order to apply some of this methodology to what you do it may be beneficial to think about identifying the boundaries. Do you consider support and resistance in your decisions and analysis often enough?
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