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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Trading Support/Resistance: A Lost Art

Trading Screen

Some traders will tell you that March West Texas Intermediate crude oil had a volatile week. If you look at the price swings over a five-day period then yes, there was volatility. If you measure volatility over a 30 or 60 day time period then volatility is non-existent. In fact, I don’t think crude oil has traded more than $3.00 north or $3.00 south of $53.00 the entire year.

So yes, the market has been delivering two-sided price action, but no, it hasn’t been volatile. I think it’s been tradable because it seems to be adhering to clearly defined support and resistance levels. I think the problem for some traders is that they like trending market. They like to play momentum on breakouts because there is almost instant gratification if you’re on the right side of the market.

Trading support and resistance, or buying dips and selling rallies, is a lost art in my opinion, because traders today have demonstrated to me that they lack the patience or the discipline to buy a market that is falling into support or sell a rally into resistance. It could just be that they don’t know how to do it.

The keys to trading support/resistance are to first identify the support/resistance, second, let the market hit the support/resistance, third, wait for the turn on an intraday basis, fourth, then buy or sell in the direction of the move.

If you used this technique this week while trading the March WTI crude oil futures contract then I think you would have survived the massive two-sided trade and reversal bottom we saw on February 7th and 8th.

The beauty of trading support and resistance this way is that as a momentum trader, you still get to buy or sell momentum while trading within the context of support and resistance if you are willing to step down to another time frame for your entry.

To sum it up, look to be a top-down analyst, but a bottom-up trader. In other words, when analyzing a market, start with the monthly and work down to the daily. When getting ready to pull the trigger on a trade, start with the daily and use an intraday time period to enter your position and to place your stop loss order. This is another way of saying identify the support on the daily, but buy only when the momentum shifts to the upside after a successful test of support.

This technique came into play on February 8 when the March WTI Crude Oil contract broke sharply into a major retracement zone at $51.43 to $50.29. Longer-term chart watchers knew this was a value area so they were looking for a move into this zone. However, they didn’t know how to trade it because the downside volatility was so strong. Furthermore, they didn’t know where the selling was going to stop and it made no sense to start buying at $51.43 because the selling momentum could have taken prices into $50.29.

What we saw on Wednesday was a break through $51.43. This triggered a move into $51.22 where the market stopped going down. Rather than try to pick the bottom, most of the buying took place when crude oil recaptured the 50% level at $51.43. In other words, traders let the market stop going down the bought on the way up in the direction of momentum.

Keep this trading technique in mind so you’ll know what to do when the situation arises again.

Technical Analysis

Monthly March WTI Crude Oil

(Click to enlarge)

The monthly chart shows that the trend is still up. Based on the current price at $53.05, the direction of the market this month is likely to be determined by trader reaction to the retracement zone at $54.20 to $50.65.

Look for a bullish tone develop over $54.20 with an upside target at $56.24. Look for bearish tone to develop on a sustained move under $50.65 with a downside target at $45.92.

Weekly March WTI Crude Oil

(Click to enlarge)

The weekly chart is essentially telling us the same thing as the monthly chart. As you can see from the chart, the key resistance area is $54.20. Except this time, because of the swings on the weekly chart, the key support is a pair of 50% levels at $50.65 to $50.37.

The upside analysis is the same as the month. If $54.20 is taken out then look for a move into $56.24.

On the downside, if $50.37 is violated then look for an initial break into $48.98. This should be considered support. If it fails, however, look for an extension of the break into $45.92, just like the monthly chart.

Daily March WTI Crude Oil

(Click to enlarge)

On the daily chart, the main trend is down. Its main range is $46.62 to $56.24. Its retracement zone is $51.43 to $50.29. Last week, the market tested this zone and mounted a strong reversal after reaching a low at $51.22.

Using top down analysis, we came into the week with the monthly and weekly trends up. This is probably why daily chart traders weren’t afraid to step in when the market was selling off sharply. Once they saw the market in the support zone on the daily chart then they waited for the selling to stop before buying in the direction of the monthly and weekly trends, but only after momentum shifted to the upside.

Conclusion

I’ve purposely avoided writing about the fundamentals this week because the two main stories – Compliance with OPEC’s plan to cut production and increased U.S. production have essentially balanced the market. This is why we have been trading sideways.

However, I wanted to point out the importance of using a combination of longer-term and short-term charts to analyze and trade the market due to the absence of volatility. When the volatility comes back it will probably be best to settle on just one chart.




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