I am beginning to read back through Technical Analysis of the Financial Markets. I initially shirked TA as glorified tea leaf reading, but I feel like there is some amount of techniques that work objectively. The trouble is finding them. To me, it seems S/R lines are fairly significant, though I have no objective evidence. Before embarking on a large study of the S&P 500 stocks over the last 10 years - has anyone seen/read any documented, repeatable studies on the predictability of future price moves based on support and resistance? Of all technical analysis techniques - these have a fairly obvious hypothesis (and are therefore testable): support and resistance form psychological points in the market people are afraid to go beyond. Alternatively, they represent the absolute limits of the supply/demand curve of the underlying over a time t. I'd be interested in hearing thoughts and especially links to studies. Keep in mind I'd like them to have some amount of scientific thought - none of this "check out my forex blog where I show how to make INSTANT millions with S/R!"
I only trade stocks.... commodities futures are different. for stocks... there is no such thing as resistance... conventional method to draw a line at the top is simply silly... 1 guy in the world trade at that price.. and you know why that 1 unlucky bastard bot the top? because my pro boys had a secret meeting and decided that day is when they'd knock it down with some narratives pushed in the media machine they control. the support has a bit more significance... because it's not pre-planned with secret meetings. usually on the way down it's chaotic and emotional and all of a sudden enough people decided the price is too low and has produced great value and they jump in.... it may get retested once or two just to clean out the lucky bottom fishers, then the price is ready to race to higher highs. I think the key is really to understand the psychology behind the formation... especially on the bottoms... then you can take advantage. e.g. enter on a retest.
Here are a few papers that might be relevant: "Pattern Recognition and Prediction in Equity Market" http://cs229.stanford.edu/proj2012/LangWang-PatternRecognitionAndPredictionInEquityMarket.pdf "Support for Resistance: Technical Analysis and Intraday Exchange Rates" https://www.researchgate.net/profil...ical-Analysis-and-Intraday-Exchange-Rates.pdf "Do Predictive Power of Fibonacci Retracements Help the Investor to Predict Future? A Study of Pakistan Stock Exchange" https://arpgweb.com/pdf-files/ijefr4(6)159-164.pdf
In my limited time observing futures charts, I've been able to discern that S/R lines are like Schrodinger's Cat and are everywhere on a chart but do not exist, until the lines are "observed" and the wave function of the line collapses to come into being. This usually takes a minimum of 3 tests before traders finally "observe" that particular point and then treat it as such, and trade it that way. So it becomes a self-fulfilling prophecy. I don't have my trading machine up to post some simple examples, but there have been days recently where it the lines were tested over and over again until it breaks. Usually happens from noon to 2PM ET. I don't have any links to studies on it, but it IS an observable phenomenon. Trouble is...I can't see how it could be used to predict any possible moves beyond that current day's action, because the farther out you go in time, the greater the chance the lines will be breached. That just can't be actionable.
Dozu, I have seen several of your comments on, and agree with your theories on the “pro boys”. I myself joke with Co-workers that equity markets are determined by a small group of fat old rich guys that basically sit around and laugh as they dictate the market and determine its direction based on where/how they can squeeze out the most $$$ from other participants..... via media, different views on current events, earnings, etc. interesting that somebody else has a similar hypothesis... Example.... the night DT was elected, the markets were down huge that night. Then next day, well, there has been no looking back since. https://money.cnn.com/2016/11/09/investing/dow-jones-trump-wins-election/index.html
Run your own studies. Percentiles for rangebound trading are an easy one, for example. I'm not on my Linux machine otherwise I'd show you a couple of things I've done. Also some sort of theoretical basis is helpful. For example, barring any sort of political change, currencies often mean revert. I'd never use this as a trading strategy but what it tells you is that there is a relative equilibrium when comparing currencies and events serve to change that balance. It's not perfect, but I've been trying to refine this idea for some time and I think I finally got it - though probably not.
Check out my forex blog where I show how to make INSTANT millions with S/R! https://www.dailygrabback.com/todays-grab-1/2017/8/4/the-resistance-is-female
Ok, an intelligent reply then, regarding stocks, the larger the mkt capitilization the more relevent support levels come into play. The smaller the Cap, less institutional support at the key levels unless the small cap is a genuine quality money making stable business. Resistance, similar to stock or mkt tops, are more difficult to gauge accurately, support and mkt bottoms are easier to identify than tops. A rising market behaves better technically than a falling mkt, falling stocks/mkts are more irrational/volatile, but as mentioned, identifying bottoms (and support levels) are easier than tops and resistance. Bottoms/support easier to spot due to rush of money entering. Tops/resistance are more vague/wishywashy due to money reluctant to exit. A toppy stock normally has reluctant money entering. Here's a pic of what a bottom formation looks like. Support is just above previous low with a rush of shares changing hands. Prevailing markets conditions have a big influence on singular stocks, a support for example may fail on a stock, not due to the stock news but due to how the overal mkt is behaving at the time. That's one reason hard & fast rules cannot apply re S/R because of outside influences.