Key moment

How those steps are formed

A friend asked me how I draw my lines of support and resistance. To be frank it is an art not a science. For the past four months I have been working with 3 lines which have contained two very broad channels inside which the market, as defined by the Dow Jones index, has moved in first one and then a second horizontal line. All fireworks and no progress.

I drew the lines as soon as they seemed to act as support and resistance. Their numerical value is a  arbitrary but is based on where the market seems to be turning round. (Think of them as bands around a number rather than the number itself.) I link these areas to price points which seemed to be important in the past: the end of a dramatic move; or a point where argument has caused a trend to pause.

The value of these support and resistance areas is that they mark the price point where I must pay special attention to what the market will do next. A bounce off support is a sign that buying shares should be profitable. A turn after hitting resistance is a sign that a short position should pay a dividend. Breaking through resistance can be even more profitable for buying shares. But it means that I must look for new potential resistance lines above the break out and should now see the previous area of resistance as a new area of support. Breaking of support is equally dangerous.

False breakouts can also represent a key moment. They can, on occasion, signal that the market is ready to break out of the opposite side of the channel.

The FTSE struggles to choose direction

The present moment is a difficult one. There has been a break out to the downside of the current area of support. I am working on the assumption that this is a false break out and have bought plenty of shares. I must be ready to change my position very fast if it turns out that I am wrong. The movement of the FTSE today, as we wait for Wall Street to open shows how finely balanced opinion is.