Acta de Pago Final: El restante diez por ciento (10%) del valor del contrato se pagará una vez realizado el recibo final y la liquidación del contrato, por parte del interventor

In the beginning, there was light. COh sorry, wrong book) Actually, in the beginning I wrote, "Exit whenever a channel line is broken". Did I mention that my words were not set in a stone? Rules are made to be broken or at least to be bent every once in a while, and so it is true with this rule. When an outside channel line is broken it usually signals an impending reversal and normally is a good time to exit. That is unless it happens to occur at a major price level.

Major Price levels are support and resistance areas where price has reached in the past but was unable to exceed. Particularly if you should see that a specific support or resistance level is showing up in a higher time frame than you are currently trading would you consider it as major. For example, if you were trading a one minute chart and come across a level where even the hourly chart has had trouble exceeding, then you know you have a major price level, at least for trading a one minute chart.

When a market breaks both an outside channel l ine and a major price level at the exact same time, it is a major undertaking and requires a substantial amount of force to do so. So rather than reversing direction, price will often continue to move onward and frequently at a more rapid pace. So if you were to exit at this point then you would miss out on a very quick move that would have brought in a very nice profit.

As the market breaks a major price level fear and greed take over and traders become very anxious to trade. The resulting orders come in like a tsunami and price movement accelerates, breaking channel lines in the

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process. This explains why the break occurred in the first place and in turn, why it fails to reverse direction after having done so.

To some extent we covered changes in momentum in the preceding chapter, so what makes this different? This particular movement tends to be extreme, fast and powerful. Trade it right and you walk away feeling as exh ilarated as a surfer that catches the extreme rogue wave of the day.

You walk away on cloud nine, which is an expression of great elation.

Get wiped out by it and you will be very depressed for quite some time.

So, what will differentiate this trade from just the normal changes in momentum are the size, power and speed of the move.

Obviously then you don't want to miss out on this trade when it comes along. So when price breaks a major price level and a channel line at the same time don't exit right away. Instead, hang on for a wild ride and some quick profits. A prime example of a major price level break can be seen on figure 4-1.

Feeder Cattle

Shortly after price breaks the previous high it exceeds an outside channel

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Major Price level acts as resistance

This scenario makes for some very nice trades, so why didn't I tell you about this before? I n order to be able to trade this set up you have to be able to determine major price levels. Without that skill this trading opportunity is meaningless. You just can't take any high or low and label it a major price level. I f you do you will stay in when you should be getting out and suffer losses. So what do you look for that identifies a major price level?

Channel Surfing

Here are a few characteristics to look for in identifying a major price level.

1 . The more times that a level has acted as support and/or resistance in the past the more i mportant it becomes.

2. The higher the time frame that a price level has acted as support and/or resistance the stronger that price level will be.

3. The very top or bottom of a market will always be a major price level as long as some time has passed since they were set.

4. Intermediate highs and lows can act as major price levels if a substantial amount of time that has passed since they were set.

5. Somewhere within the center of the entire price movement (50% level) is a major price level. Several points of support and/or resistance will usually develop that help to identify where it is.

6. The top of a large ascending triangle or the bottom of a large descending triangle covering a substantial amount of time.

7. Major round numbers such as 50, 1 00, 1000, etc.

8. Long term moving averages that are commonly used by market participants.

These are just some examples of where you will find major support and resistance levels or as I have termed it here, major price levels. Unlike some patterns and situations that you may encounter when trading, major price levels are never shrouded in mystery because the market clearly indicates where they are. However, if you still have trouble determining these levels I would suggest further study. More information can be found in various publications dealing with basic technical analysis and this specific subject is covered quite frequently. I f you run into a situation where you are not sure whether you are dealing with a major price level or not, the safest course would be to fol low our original rule and get out of the market as soon as a channel line is broken. It is better to miss out on a quick profit than to take a quick and substantial loss.

Not all major price levels are highs and lows

It definitely pays to be cognizant of any major price levels within a market.

There a number of traders who will trade solely on them, including professionals. Copying their method is a relatively simple process that only requires you to scan for markets that have reached new highs or lows,

Michael J. Parsons

which would naturally be major price levels. An added filter on any scan would be to limit the amount of time covered. It is not necessary that a h igh or low be the greatest since the first trading day of that particular market, but only that enough time has passed so that any break would be viewed as a major accompl ishment.

But you should also be aware that major price levels are not always a high or low. There are three in particular that relate to crowd perception and have l ittle to do with any h igh or low that is set within a market. They are the fifty percent level, long term moving averages and round numbers.

Within crowd psychology there exist certain perceptions regarding any market. At what point does the majority change their belief that the market is no longer rising, but fal ling? A number of common elements overlap to create the general consensus of market bias. For example, fund managers will often use sixty day moving averages as a determining factor. But whatever method may be used, at some point the majority will change their view of the overall market direction within close proximity to one another. When the consensus changes so does the position of the larger percentage of traders. The result can be as powerful as any major price level break. Perception is the name of the game. Discover what will change the perception of others and you will know where the turning point will be.

Critical moving averages

One of the simplest and most common methods used to determine market bias are moving averages, particularly larger samplings. The critical ones will encompass ranges such as forty-five, sixty, eighty or a hundred and twenty just to name a few. Obviously, major critical moving averages are not of short-term duration. Markets will differ as to which duration is favored, but it doesn't take a great deal of effort to determine what they are.

Most markets will have pullbacks that line up very well with their favorite durations. Experiment with a few settings and observe which ones price bounces off of and you will know the favorites. When a critical moving average is violated then a change in the consensus can be expected. Figure 4-2 shows the power of a favorite moving average in Coffee.

Channel Surfing

The halfway point

When you look at half a glass of water do you see it as half full or half empty? We all recognize what half is, but what if something is slightly higher or lower than half? Mentally, if something is less than half then it is mostly gone. Never mind that the amount below hal f is very m inimal. If there is more than half, then it is mostly full. It is a perception game played on us by our minds. This perception game fol lows us when we enter into the world of trading.

Take any chart and find a defined high and low and the halfway point between them. If price is currently lower than that halfway point then you most likely see this market as bearish and will be more inclined to sell. If price is higher then you probably see it as bullish and will be more inclined to buy. Where price sits in relation to recent activity goes a long way in formulating our belief about market bias. This is why the halfway point or fifty percent level of market activity behaves much like a major price level.

In actual trading it isn't necessary to measure an exact halfway point between the highs and lows. It is more a matter of recognizing the market's perception of where the halfway point sits. These levels will generally have highs and lows that buffer them and set them apart. Take a look at figure 4-3 and see how greatly halfway points impact a market.

Michael 1. Parsons

This halfway point acts as resistance twice

Big fat round numbers

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Another major price level that is not always obvious is that of round numbers. We all tend to get hung up on numbers. It is another game that our minds play on us. Advertisers know this all too well . When you go to buy something that costs around three dollars you will often see the price l isted as $2.95 or $2.99. Why the odd number? Because a whole number changes our perspective and a slightly lower price fools us into bel ieving we are getting more for less, even if the difference it is negligible. This makes us more receptive to spending our hard earned cash. Price a product at $3.05 and all of a sudden there is more reluctance to buy. Six cents is hardly worth any concern, but mentally we see it as another dollar.

The same principle applies to round numbers within a market. Certain numbers change the view of market bias. If a market exceeds a round number and the market is able to sustain it, then it is likely to continue in the current direction. Often, it will do so at a more rapid pace. I f a market reaches a round number and fails to hold, then it is likely to reverse in a dramatic way.

Take a look back at the major US indexes and you will see how this has proved true. I n figure 4-4 the NASDAQ i llustrates this point very well when it hit 5000 early in the year 2000, but was unable to sustain this level. It then promptly dropped for the next couple of years losing more than three quarters of its value. But this was not the only round number

Channef Surjing

that this market responded to. In 1998 it rose to 2000 and then fell for the next three months, dropping more than 500 points. Toward the end of 1999 it broke 3000 and then dramatically increased its pace moving over 2000 points within a five-month period alone. When the market started to drop in the year 2000 it reacted again to the price level of 3000 by halting and promptly rising back up 1 000 points. When it finally succeeded in breaking below 3000 it did so with a vengeance and from then on it was painfully clear to investors that the bull market was over. The S&P and Dow have shown similar reactions at round numbers as well.

Just a s the 3000 level is broken there is a dramatic acceleration

Then bounces off the 1500 ^level

So round numbers will often act as major price levels even if they have never been reached before. The human tendency to focus on round numbers is undeniable and shows even in the markets.

Whether you are dealing with critical moving averages, halfway levels, round numbers or established major highs and lows, it always pays to be aware of them and to take them in consideration when making your trading decisions. The market certainly does.

When a break of a major price level fails

Although breaking through a maj or price level will usually result in a continued move, not all do. So what bappens if a market breaks a major price level but then stalls? A fai lure fol lowing a break is a common occurrence. I mentioned earlier how some traders will push a market

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in order to h it stops even though there really wasn't any momentum to sustain the move. This can happen even with major price levels. No support or resistance break is guaranteed to succeed. It is stil l a matter of perception by the majority w ithin a market.

If a market stalls and particularly if it retreats off of a break, the first order is to exit from your trade. A market that returns back across a line that it just broke is not to be trusted. This is a breakout failure and it changes your entire analysis. Even if price just l ingers near the breakout l ine, hugging it j ust on the breakout side, it is sti l l not to be trusted. Just as in the case of when you are deal i ng with a reversal , price should start t o move fairly quickly into new territory. The only exception would be a characteristic brief kiss goodbye of the major price level.

The second order when dealing with a fai lure is to take the opposite trade. Remember that it takes a considerable amount of force to break major price levels. If that force is exhausted in crossing a line then the opposing force takes over, usually with a vengeance. This is where you will see volume pick up drastically and a flood of orders rush in. In essence, a market has gotten all dressed up with volume and is determine to go somewhere. I f one side won't take it out on the town then it will go with the other. It has no conscience.

The other side of the trade simply fol lows the rules that you would use when trading any other reversal. Enter on a channel line break and then establish a set of channel l i nes to act as your running stop.

It may not have gone far i nto new territory on the break, but watch it do someth ing now on the return. I n figure 4-5 Oracle fails to sustain a break above $ 1 5.00 a share and with in two months price falls below

$ 1 1 .50 a share.

Major Price levels equate with major paychecks if you know how to recognize them and how to use them. People tend to get excited when they see such levels broken and the resulting influx of orders often explodes with large and quick moves. Often, this is in the direction of the current trend but even if it does reverse direction you still may have an opportunity for a nice profit simply by reversing positions. So a major concern for your trading should be major price levels.

Channel Surfing

After successfully exceeding prior highs, price is stopped by the 15.0 level and quickly drops

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Oracle

Price Bands and Price Zones

If you have read any of the more common publications on technical analysis you have already recognized major price levels as an equivalent to major support and resistance. The concept of support and resistance is simple;

the levels at which price stopped in the past will tend to halt price again in the future. Some of the things that we have already discussed are simply an application of these widely known concepts. But our emphasis here has been on major price levels that elicit a strong reaction from the market rather than those that have only a momentary reaction. Support and resistance theory has certain inherent fail ings when applied in real life. Even when dealing with major price levels support and resistance can at times be very frustrating. They are even more so when these levels are only minor. I n a later chapter we will discuss how to overcome these shortcomings, but for now we just can't ignore the subject of support and resistance entirely. I f you have used these levels in the past then you know that the market will often react to them even if they are not really "major". But more often than ·not price will play with them, dancing on both sides before actually making any substantial move. So they do have value, just frequently are hard to predict.

When using standard support and resistance levels it is often best to interpret them based on bands rather than a thin l ine of price. Additionally, price activity in general will often congregate into wider zones, which is of itself an extension of this concept of support and resistance. Price bands

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and price zones are particularly evident when a market has been in any long term trading range.

What this means is that price will bounce back and forth between ranges that are fairly wide, with support and resistance levels loosely overlapping these zones in narrow bands. So there are two aspects here to consider; the narrow band that is identified as support and resistance and the wider zone containing most of the price activity. Since we started our discussion with support and resistance, we will address support and resistance bands first.

Price will frequently jump back and forth over a specific level normally identified as support and resistance. It is obvious that these levels have significance, but actually defining a specific number on this significance is another story. It is much better to define support and resistance as a narrow band. The negative aspect of handling it this way is that you are allowing much more room for error and so a larger stop loss is required.

But on a positive note you are less likely to have an activated stop force you out of a market just prior to a substantial move. Figure 4-6 illustrates an example of a support and resistance band.

These narrow support and resistance bands will have a center point that will equate with a set price. A band can be extremely narrow but usually

These narrow support and resistance bands will have a center point that will equate with a set price. A band can be extremely narrow but usually