What's In A Line by John Gajewski
May 8, 2012 0 CommentsWhat’s in a
line?
by John
Gajewski
Technical Analysts have a
penchant for drawing lines over their charts – trendlines, channel
lines, angle lines, regression lines, lines of support or
resistance. What do they mean and are they
important?
The basis of technical
analysis is that price discounts everything and that the price
chart reflects the swings of supply and demand. It follows
that the swings on a price chart tells us something about the
underlying structure of the market place.
The key points are the
swing highs and lows. These represent the points at which the
control of the market shifts from supply to demand and back
again. These points should not be taken lightly.
Serious decisions have been made at these points and they have the
potential to influence the market for some
time.
Do all these highs and
lows have the same importance? How do we identify the ones
that count? Take for example the Aussie share market from
late 2007 that encompass the 2008 selloff and its subsequent
recovery to current levels. Of all the swing highs and lows
which ones are important?
IF a high or low is
important then sellers and buyers should behave in a similar way
when price returns to that level. When sellers and buyers do
respond in the same way then the importance of that price level
will increase.
The March 2008 low was
such a point. After a rally prices returned to this level and
attracted buying interest, evidenced by the decline shifting to a
period of ranging. It affirms that this level is of
importance to a significant portion of the market. Although
buying efforts were not successful in stopping the price decline,
they made a statement about the market – the March 2008 low was a
significant level for a significant section of the market.
How important became clear a year and a half later when the rally
stalled and did not advance past that level. Reactions off
this level proved to be quite aggressive.
Why did prices stop at the
March 2008 level again? Who knows? Maybe many of the
buyers at the March 2008 level held their positions through the
2008 collapse, were shaken by the experience and used the return to
their entry points to exit those positions, thankful to be getting
out at a minimal loss? Maybe. What is important is that
the area of the March 2008 low was once a significant decision
point, and will once again be a point where market participants
will think carefully again.
How the market reacts at
these past decision points will have far-reaching
repercussions.
Let’s think exactly what
happened in 2008. It was not the March 2008 low that was the
key; it was the attempt to buy again in the July to September
period that gave the level importance. The success of the
attempt is not important. It is that there was a lot of
decision making at that level that is the
key.
This sort of action can
happen at any level. Look at the minor low of October 2008,
two swings below the final low. The subsequent minor swing
high in January 2009 and then considerable ranging just above this
level between April and July, showed another area of considerable
decision making. It’s importance was demonstrated later in
August 2011 when the selloff of that year failed to pierce
it.
When prices rallied
strongly in 2009 or fell strongly in 2011, they moved freely until
they reached the area of the last major decision point – the March
2008 low and the 2009 line. It was time to carefully
reconsider one’s position in the market.
Now look at the March 2011
low, the low between the last two highs retesting the March 2008
low. We can see similar responses from the market but on a
smaller scale. Buyers made an effort in June when prices
returned to this level without success. Prices then fell
freely until the next key decision point in the market, the 2009
decision point. Not surprisingly the reaction off the August
low returned to the March 2011 low, the next line of resistance,
where it is today.
What can we extract from
these levels for an understanding of the market? By reacting
to levels created by the 2008 decline, the Aussie share market is
still in the shadow of that decline. Is the action since the
2009 low a consolidation or building the base for the next
uptrend? That is not easily answered. However, we do
have key levels to watch which when broken will have major
repercussions.
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