A Bandit recently asked me about levels and how long they should be watched. This was a great question, so I wanted to be sure to share this exchange with you.
Question:
Jeff, I’m new to trading (since Christmas). I’m wondering how important long term resistance levels are. I suppose it depends really on the market conditions. A skittish market probably respects them more. This market seems to be plowing on through them regardless. The NASDAQ now, is free and clear of them with its breaking through the eleven year high, unless it goes down again.
The reason I am asking is that I’m sticking to a 4 1/2 month chart and ignoring any information older than that. It simplifies things and I wonder how far back people really remember. I also am thinking the older the resistance/support level, the less significant it is. Do you think I will be ignoring less recent history at my peril? I also find that the more information I bombard myself with the less clarity I have.
Thanks
Answer:
Great question and this really deserves its own blog post so I’m glad you asked. To answer you though, here’s my take on it.
I’ll begin by saying as long as a level is being respected, it’s worth taking note of. That pertains to an individual stock which keeps knocking on the door over the past few weeks, or to an index chart like the NAZ which has just recently pushed through multi-year resistance.
So, they’re worth taking note of. As far as how important they are, let’s consider the psychology at work here, which is what it really comes down to.
Technical levels are representations of buyers and sellers, which often times base their decisions on emotions. The older the level, the less emotional significance I’d attach to it. More recent levels are fresher in terms of emotion, and therefore tend to get respected to a greater degree.
I’d say anything inside 18 months or so is game, whereas I place lower significance on multi-year levels. They may be noticed by technicians, but anyone who has held for 11yrs in the case of the NAZ isn’t likely to bail out now that they’ve finally gotten their money back – I think they’re the “invested” crowd who never truly intends to sell.
What do you guys think? What would you tell this new trader?
I’ve wondered the same thing, so thanks for posting on it. Sometimes I look at a chart and only want to see where it’s been in the last 3 days, with extremely low “climate” vision on the last 6 months or so. Sometimes when I look at the monthly charts, I feel like that isn’t enough to get a good picture of where my trades are going, even though I’m looking for a short term 3-5 day trade.
I guess it depends, for me, on what kind of stock it is. Is it an emerging company that’s poised to strike rich? I’d only care about the last 3 mos. Is it a big gun that I want to capitalize on a business decision? I’d probably watch the last year to make sure I’m not headed for the downside too much while I wait in it.
These are all feelings and theories I’ve developed before I signed on with Jeff, so take them with a grain of salt. I’m probably one of the newer amateurs on here.
Thanks for your comments Justin. I think it boils down to your timeframe for trades…if everything is intraday, then perhaps the past 3 days or so can be adequate. If you’re looking for swing trades to last several days at a minimum, then you have to look at recent weeks & months I think in order to gauge which levels could interfere with the trade.
Share your questions here anytime and utilize me for help as you continue to learn – that’s what I’m here for!