Volatility-Based Technical Analysis

Gold Futures Till the Deadline

The recent gold futures chart has been a good visual barometer of geopolitical financial uncertainty; and it has given our broadcast media so much easy content.  But what could really happen in the next week?  I think it's beyond most forms of analysis.  But I do think that volatility-based analysis can help to identify the extreme possibilities for the short term.

(if you would like to better understand the type of support and resistance analysis shown in this blog see the VBSR QuickStart chart.)

For full disclosure, I'm currently long GLD beginning 6/28/2011 at 146.42, with a stop at 152.49.

Above, the daily chart shows a congestion zone between S/R 1 (1623) and S/R 4 (1529).  It also shows the three month trading range we've experienced.  The weekly chart below shows that N band resistance above sits at about 1725 for this coming week.   The bottom of that range is where the daily chart S/R 5 line, the weekly chart S/R 4 line, and the trading range align.  This makes for strong support.

Technical analysis aside my personal belief is that debt ceiling battle will be settled at midnight on August 1st.  Republicans won't risk angering their political base by making concessions.   Democrats are playing the same game.  With the 2012 elections on the horizon no one will be rewarded for showing wisdom.  Each side will break their promises at the very last minute and will cloak their schemes within the guise of "I had to do it to prevent the unthinkable".

Base on that logic alone I think there is a higher likelihood of gold rising in the next week, than falling.  In the three day chart below you can see that price is pushing upward on upper N band zone resistance.  However when extreme fear is present the outer N band of the higher time frame is usually the best gauge.  In this case I think that is the weekly chart above.  Therefore I think that 1725 best defines the worst case chart scenario of potential political brinksmanship.  If that level is reached I'll certainly take profits there.

I don't think there's a perfect method for playing crazy times like these.  But I do believe that understanding the probable extremes helps greatly with targets, stops, and risk-reward analysis.

Can anyone add to this analysis? 

Kirk Northington
Northington Trading, LLC
www.metaswing.com
kirk@metaswing.com
Twitter: @kirknorthington
author: Volatility-Based Technical Analysis, John Wiley & Sons

 

 

 

 

Natural Gas: Support/Resistance Range

Natural Gas has seen its share of fundamental market changes in recent years resulting in relatively low prices.  As we look ahead there is some clear volatility-based overhead resistance in the months to come.

(if you would like to better understand the type of support and resistance analysis shown in this blog see the VBSR QuickStart chart.)

Below there is a monthly continuous chart of Natural Gas.  The behavior of the N bands and SR lines show a year-long reduction in price volatility.  The dual oscillators below confirm the drying up of volatility.  Additionally both N bands are turning inward.

Beginning in March 2011 an area of resistance line compression formed above price, roughly between 5.00 and 6.00. This increases the time this instrument would normally require to rise by 1.00.

Drilling down into the 3 day chart below, we can see that Nat Gas shows a bit more recent price strength in the area of a possible uptrend trying to form.  When prices begin to trade above the SR 3 and 4 level it can mean the beginning of an uptrend.

At this point it looks as though Natural Gas can test the 5.03 resistance point.  That is to say that based on the current support and resistance picture a test of the 5.03 resistance is more likely than testing support at 3.45.

Can you suggest any further technical readings to augment the range identified?

Kirk Northington
Northington Trading, LLC
www.metaswing.com
kirk@metaswing.com
Twitter: @kirknorthington
author: Volatility-Based Technical Analysis, John Wiley & Sons

 

 

Silver: Support/Range Range

My previous two blogs focused on the support and resistance in metals, and the resulting forward probable trading ranges, based solely on that analysis.  In this blog we will follow up on how those projections have turned out.  Also we will look at a similar analysis for the current picture of silver.

(if you would like to better understand the type of support and resistance analysis shown in this blog see the VBSR QuickStart chart.)

In the blog post from November 26th, 2010 and January 15th, 2011, we looked at the effect of a weekly compression of the upper S/R lines, and how this would tend to reduce directional price movement.  The weekly gold chart below shows that the compression range did persist, and greatly helped to define the trading range that since occurred.  

However three weeks ago S/R lines 1 & 2 reset upwards.  This serves to end the compression and increase the probability that price will rise to the next resistance level.  The time delay of the last three month's trading range has given the upper N band time to begin retracement.  The likely N band trajectory will form the next area of resistance for this time frame.  The lower N band is rising rapidly providing strong support.  This all points to a higher expected trading range in the next month.

In the blog post from January 15th, 2011 I wrote about copper's likely trading range.  On the daily chart of copper below, you can see that price has moved up into a new area of compression based resistance.  However the N band trajectory is predicting that S/R 1 and 2 will reset upwards in the next eight to ten sessions.  With the lower N band turning up this should cause copper's price to rise in the coming two or three weeks.

Now we can add silver to the mix.  Silver has gone ballistic in recent months.  The daily chart of silver below shows how price has just entered a compression area of resistance.  This should provide some degree of price chop and pause.

The daily price action in the next five to ten sessions will be telling, because it will provide more time delay for the upper N band on the weekly chart below to fall further.  Based on that N band's trajectory we can plot a more probable trading range for silver.

Let's face up to the situation for what it is though.  Silver is undergoing dramatic price volatility and is thus difficult to predict.  Identifying some part of an improbable trading area is the first step towards forecasting a probable trading range.  The best useful analysis I can see is the declining upper N band on the weekly chart.  In one month it should define resistance between 35 and 36.  However support is currently far below at 25.  We'll stay tuned to see how this one turns out.

What methods would you use to augment this analysis, and identify trading ranges?

Kirk Northington
Northington Trading, LLC
www.metaswing.com
kirk@metaswing.com
Twitter: @kirknorthington
author: Volatility-Based Technical Analysis, John Wiley & Sons

 

Copper: Where will it play next?

In my last blog I noted that Gold had entered weekly support/resistance compression area.  It had traded in that range for about 7 weeks.  Also the daily chart compression had just ended when its S/R lines reset higher.  See chart below.

Update:  Since then it has traded another five weeks in the upper half of that compression.  See the chart below.  Compression ranges don't hold forever.  But when if it breaks above the compression the highest S/R line will make for significant support.  Likewise the lowest S/R line will form significant resistance should price break below.

It is important to note that support and resistance is only one part of technical analysis.  This blog is only addressing that piece.

Copper is in the midst of a strong trend.  In the weekly chart below you can see that in December it cleared the top of a compression range after trading within it for eight weeks.  In looking forward three or four months it is obvious that both N bands will rise rapidly.  As a result Copper is not likely to fall below the 360 level any time soon. 

In the chart below we switch to a daily chart of copper.  As a sign of a strong trend price barely paused when it traded through a three week compression range in December.  S/R lines 1 and 2 reset upwards in response.  The recent sideways motion of the upper N band will likely form a new compression area.

If we combine that probable daily compression with the upper point of the previous weekly compression it leads to a short term trading range between 405 and 470.  By short term I mean six weeks.   With the trend being strong the probability is higher that it could hit the upper end of that range before it could hit the lower end.

What methods do you use to successfully identify trading ranges?

Kirk Northington
Northington Trading, LLC
www.metaswing.com
kirk@metaswing.com

Support/Resistance Compression

When Markets Experience S/R Compression

In my last blog I noted that he the Dollar Index had just reached a weekly support level at 76.23.  It went on to test that level again, and has since reversed.  It is now headed upward into a support / resistance zone originally defined in February of this year.  The zone is from 80.80 to 82.19.  It functioned as resistance in during February through April, and as support in August.  

The dollar is once again heading into that zone.  This may not have much impact on directional movement this week (the week beginning 11/29/2010), however the odds favor it acting as resistance by next week.

For more than a month the S&P 500 Index daily chart has been caught in what I call a compression configuration of support / resistance.  This is when a pair of S/R lines is located in close proximity to another pair of S/R lines.  Technically they are less than one ATR(40) apart.  In the chart below you can see the compression.

When this occurs there is a higher probability that directional price action will slow down, even though daily volatility may stay the same.  Price tends to bounce around between the highest and lowest S/R lines.  I did a study of this condition within the S&P 500 stock population and found that volatility decreases by 36% when price enters a compression area.

In the chart below you can see how Gold entered an area of compression about seven weeks ago.

When we switch to a daily chart of gold below you can see how the compression also existed for three weeks in a daily time frame.  However last week S/R 1 and 2 reset upward.  This will make it easier for gold prices to move to the higher end of its weekly compression range of 1417.

Kirk Northington
Northington Trading, LLC
www.metaswing.com

Market Movement Through Resistance: Trading a swing once the broader market moves through resistance

I have found, for my own well being, that reacting to the market is much better than constantly trying to predict it.  Here is a trade from last week which occurred only because the bank of Japan fueled a further drop in the dollar.  I couldn't predict that event, but I could react to it.

In the chart of the S&P500 below you can see how the broader market is stalled in a resistance zone from 9/21/10 through 10/4/10.  This resistance zone is between S/R 3 and S/R 4.  My gut had been telling me that the market would roll over before turning higher.  But as you can see the index punched through resistance with strength.  It was a highly positive market breadth day; and confirmation that the markets don't consult my gut for advice. 

After reviewing long signal candidates I liked the look of CNH the best.  In particular I liked the way that it's daily N band was just then peaking a good distance above, leaving unfettered room for movement.  On the opening of the 5/6/10 trading session its S/R 1 and S/R 2 lines reset upward to this new peak.  In an uptrend this is a good development.

My directional trade signal (which is outside of this blog's context) actually occurred two days previously on 10/4/10.  Its method calls for a hold time of 5 days.  Entering on 10/6 put me two days late in the trade; CNH had already begun its reversal.

This is where the sticky philosophical part comes in.  Two days later, thanks in part to some timely analyst's upgrades, CNH reaches for the rafters.  However the trade method is scheduled for an exit no later than the close on 10/8/10.  Do I exit as my rules call for, or do I hold and risk an overnight gap down.

My exit at 40.00, based on intraday analysis,  was not my best.  However, recently I turned a winner into a loser in this exact same scenario; because of my gut.  All quantitative arguments aside, I can tell you that that previous  trade hurt more than settling for a 10% profit on this trade.  Ultimately the resistance of the upper N band would have been the best exit.

Are you more comfortable with mechanical rules, or discretionary decisions?  Would a careful self examination within that topic help your trading results?

The Dollar

An interesting note is that the dollar index may be at a weekly support point.  The chart below shows it having just reached the S/R 6 support level.

 

 

 

A Different form of Relative Strength

In this post I want to look at a way to use volatility-based support and resistance to gain insights on sector relative strength.   If you want to better understand the support and resistance discussed herein you can see the VBSR QuickStart chart.

Last month we looked at the overhead resistance that faced the XLK (Technology SPDR), and the XLB (Materials SPDR).  The resistance for the XLK was further away than for the XLB.  I also mentioned that the XLY (Consumer Discretionary SPDR) resistance was similar to the XLK, and that all were more overbought than not.

As soon as I posted, poor economic news clobbered stocks across the board.  That set up a great opportunity to watch them claw their way back up within their respective resistance environments.  As shown in the percentage relative strength chart below the XLB outperformed the S&P and the XLK.  Also the XLY beat them all and was the best performing sector.  It is at this point that their resistance levels become more critical if the market continues to rise.

Source:   http://www.sectorspdr.com/spdrchart/

Another important consideration is the relative strength demonstrated during this last month.  Here is a different way to look at relative strength.

In this analysis we can look at a smaller time frame by using hourly charts.  Therefore this analysis is for shorter term trading decision support.  An hourly time frame enables us to look at specific price action with respect to recent and current resistance areas.

When price reaches higher and pushes into previously established resistance, volatility measurement responds by defining new and higher levels of resistance. 

In the chart below the XLY establishes a volatility peak on 8/19/2010; see circle 1.  Forward to circle 2 and you can see that on 9/3/2010 the XLY moves into the resistance zone established by the 8/19 peak.  Consequently the price action of 9/1 through 9/8 ultimately causes a new and higher peak to form.  This effectively moves resistance higher.  When this occurs the odds that price will move higher increase.

 
 Now contrast that to the chart below of the XLK.  Examine the same dates as labeled with the same numbers.  It also established a new volatility peak on 8/19/2010; see circle 1.  However at point two, also on 9/3, its price action does not reach the previous volatility peak the way that XLY did.  Subsequently its resistance zone does not climb higher.  In this respect the XLK sector is showing less relative strength, compared to the XLY, over the previous eight trading sessions.

Of the nine sector SPDR ETF's the one that seems to be demonstrating the most relative strength is the XLP (Consumer Staples SPDR), shown in the chart below.  Like the other two it set a new resistance peak on 8/19/2010.  The main difference for the XLP is that it's price action has not allowed enough band retracement to cause a new peak to form.  Also its upper N band is now moving up rapidly, which serves to establish a relatively higher resistance zone in the future.  This clears the way for price action to move higher, less impeded by resistance.  

It's also worth noting that two other sectors pushed resistance higher.  The XLU (Utilities SPDR) pushed its resistance lines higher with a band peak that occurred on 9/2/2010, and the XLF (Financials SPDR) did so on 9/3/2010.  With utilities and consumer staples showing strength, is bearish sentiment showing itself?

I think there are many good ways to measure relative strength, and this is one of them.  If price is pushing the levels set by its previous boundaries, even as measured by a derivative, then it could be said that it is performing past its potential.

 

 

S&P Sector Support and Resistance, 08/11/2010

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.

 

click to see expanded chart

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?

Market Outlook July 2010

Do we really need to establish a pattern of previous highs and lows to identify a point of resistance or support.   I don't think that's required.  Further I believe that the markets will not make things that simple for us.  Projecting forward significant chart-based volatility levels can be the answer to the challenge.

This past week the S&P 500 Index reached significant daily support at 1012, when it got to within one half ATR(40) of the lower N Band.

 

Simultaneously the index sunk to the weekly SR 5 support line.  The upper SR lines, 1 through 4 are tightly bunched together, which indicates heavy overhead resistance.

 
With all of this in mind I think there is a likelihood of a trading range setting up between 987 and 1208.  The duration of the range should persist through September.  I say 987 because that is roughly one ATR below the Weekly SR 5 support; which is the SR 6 support line. 

To read more about projecting support/resistance forward, below is an excerpt from Volatility-Based Technical Analysis:

Support/Resistance: Flat is Out

Perhaps the most effective method of detecting support and resistance in the markets of old was a horizontal price line.  A simple straight line sits at a previous significant high or low price.  In the correct circumstances using this extreme price point of a past swing functioned well.  Its strength was clearly in high volatility environments.  In this first decade of our new millennium a previous high or low has given way to volatility based support/resistance.

In Figure 7.6 a chart of Gilead Sciences (GILD) shows horizontal alignment of prices at two levels.  In circle 1 the low price for the day is set at 16.03 after a sizable gap down the previous day.  Going forward it set the extreme low for over two months.  In circles two and three this same low is touched and used as support.  In circle 4 an upward price swing sets a high of 17.85.  Two months later it appears to be used as a level of resistance.  These horizontal alignments appear to be straight and true.

   
By contrast the same chart as viewed in MetaSwing (Figure 7.7) shows that support and resistance levels were due to different causes:

Circled Area 1 shows that price closes at the lower N Band locations.  This price action and sets the peak in the N Band volatility measurement.  Consequently and new S/R 6 level is set.  One month later it serves as support for the low on November 22nd. 

Circled Areas 2 and 3 make it clear that the dominant support areas are due to S/R 5 and 6.  It certainly does not hurt that there was a previous price low set which lines up with the S/R line.  S/R 5 and 6 were set because of the price action that occurred during December, which caused the lower N Band to turn down and form a peak.

Circled Areas 4 and 5 show a very interesting distinction.  The highs in area 4 line up with S/R 3.   Months later S/R 3 is reset higher and is a bit more accurate at defining resistance.

It isn’t that previous price levels don’t have an effect on current levels of support/resistance.  They do but it is very limited, and is declining as time pushes forward. 

It’s important to note that many high and low prices, represented by long upper and lower candle wicks, are present because of a few transactions.  There is often only a tiny fraction of the day’s volume that sets this extreme, and therefore renders the price action at that level as insignificant.  Just as often there were no actual transactions at that those prices; it was a data error reported by the exchange and remains uncorrected by your data service.  If we have to wonder if the price was real or significant, it makes it that much more difficult to rely on a previous price level.

Resistance and Support Cometh

This market has been rising with more force than a Saturn V rocket.  For trend trading statisticians it has been a fun time in the 'fat tail'.  And for as much as most of us can predict, it may be that way for some time.  However the presence of resistance is usually best not ignored.

The S&P 500 Index daily chart is currently skirting the one ATR proximity zone to its upper N Band.  Even though the band is already rising, the S/R 1 and S/R 2 lines are very close at 1093 and 1078 respectively.

To confirm this overhead resistance the S&P 500 Index weekly chart is beginning to push that same one ATR proximity on an upper N Band that has not yet turned up.  This is good evidence that the recent rally will likely see some pause in its rapid advance.

Many believe that the equity market's recent strong rally has been caused by the dollar's decline.  The dollar however may be facing an opposite situation to that of the S&P 500.  It is quickly approaching support in both the weekly and daily timeframes.  On the daily chart of the dollar index ($DXY) the month long S/R 8 line at 75.49 is waiting for it.

Further the weekly chart shows that the S/R 6 line is at 75.54.  Additionally the lower N Band is ascending to provide event stronger support.  Its resistance effects should converge with price in about two weeks.

When multiple timeframe analysis shows that volatility-based support and resistance lines are right on top of one another their strength is much greater.  Based on these charts there's an awful lot of evidence that in the next five to ten trading sessions the atmosphere will likely be different than it has been.  I'm not calling it a perfect storm, but both forms of volatility-based support and resistance are converging on an inter-market relationship.