One concept I have great trouble with is the thought of gaps providing support and resistance. I can see the psychological basis for zones of congestion providing support or resistance when they are revisited, because there are a bunch of people who made the wrong decision at that price previously and might jump at the chance to reverse it. But for the life of me I cannot see why the previous absence of buying and selling should provide support or resistance.
Support and resistance is still just as valid now as at any time. The difference is that resistances have been getting busted with more ease than previously, making them seem less relevant. For the past year or so, supports were the ones that tended to get breached easily. I personally believe that this is nothing more than a bear market bounce, which can be quite powerful. And it's true that the market is very overbought at this point. However, until a major support fails, don't bet against the dip buyers who have been in control lately.
Well for one a lot of people are watching the gaps, so there's the self-fulfilling prophecy thing. But more importantly, a lot of people enter/exit at the gap when all their stops are hit on a gap move, so you have a lot of people who enter/exited at the same price. E.g., if S&P closed at 1140, and you have 5 people with buy stops at 1145, 5 at 1150, 5 at 1155, and 5 1160, and the market gaps open at 1160, now you have 20 people who hit their stops at around the same price (top of the gap). "20" is just a hypothetical example, but u get the picture. Now if there wasn't a gap and the market moved from 1140-to-1160 then you'd have stops hit at various places during the move, so maybe no S/R at all.
We have all seen these bear market rallys over the last year or so and I'm not saying that this isn't another one. But looking at the charts, this one looks different. My data provider is down at the moment so I can't list details here but look for example at the Q's (I'm looking at weekly candle charts). Volume has been heavy & steady during this latest rally, similar on the SPY & DIA, though not as extreme. And take a look at the length of this rally compared to the Jan 2001 & March/April 2001. Those prior rallys were only about 2-3 weeks then prices just flattened out into a long trading range and prices finally started drifting lower & lower (though this occurred more quickly on the Jan 2001 rally). This rally has been longer, and thus far hasn't flattened out. Also, think about the formidable feat of not only closing the Sept 11 gap but surpassing the Sept 10 levels. If the market was still as weak as it was for the prior rallys, this one would have failed at that gap, but instead it barely hesitated. My only concern is that for the Q's, we are at the 50% retracement level for the bear run from April's highs to the Sept lows (which my calculations show to be at 39.58), which links up nicely with some other possible resistance levels. We have broken the 50% retracements for the same period on the SPY & DIA, but are approaching 64% retracements which happen to coincide with some other possible resistance areas (my numbers put the 64% levels at 118.31 for the SPY & 101.35 for the DIA). Although I'll trade this thing whichever way it goes, my guess is that we retrace part of this move (when it finally ends), but that we don't even get close to the Sept lows. Then we base out and trade sideways for a while between the highs & retracement lows, then turn higher (however slowly it may be!). Picture the scenario that makes this thing ultimately look like a weekly reverse head & shoulders, with the March/April lows being one shoulder, the Sept lows being the head, and the retracement I predict being the other shoulder!
ArchAngel, Really, enjoyed your post of 11.15.01 ! Could you be kind enough and give us more info about this " trading guide " of yours ? I am especially interested, on multiple SRs used in trade management. In your text it says "... multiple SRs exist during the day and are important for trade management, as we will see in the next section. " OR, you did not follow, with the text, in the next section ..... Many thanks for your help ! Good trade !!! MD - doc