Support level becomes a resistance level
Another
interesting feature which can be seen in the S3 curve is the familiar property
that a support level which has been violated
becomes a resistance level when apporached from below. The reason for
this behavior will also be clear when we derive the S/R algorithm.
Most
importantly please take note of and remember the catastrophic failure of S1 to
halt the price decline to below 13. This
underscores the fact that the future is after all not cast in concrete.
The perceived prospects of stocks are subject to abrupt and unforeseen changes. While an existing S/R
hierarchy may be strong enough to bound the price variations within a given set
of assumptions in the market regarding
the prospects of the company, its group and the market as a whole, any sudden
shift in this paradigm can call into a
play a totally new price dynamic.
Fortunately,
this is not always necessarily the case as may be seen in the Midas chart for
Humana. Note first that as with Tandem,
the level penetrations at points "a" and "b" did not
invalidate their subsequent viability. More significantly, note that the
recent sharp decline (brought about by
a sudden reappraisal of all health care providers, or what we may call a group
paradigm shift) was halted - at least
for now - at a (mature and well-validated) S3.
Finally,
to come full circle, in the first article we showed a conventional price and
volume bar chart and followed it with a Midas
chart of the same stock (Magma Copper). So now let's look at a bar chart
for Humana upon which we have superimposed the
Midas S3 support level. The results speak for themselves. The clear fact
that so many apparently unrelated points of trend reversal can be understood with reference to a single
theoretical S/R curve testifies to the power of the Midas method. Indeed,
recalling the analogy in article #4
with atomic spectra, it is perhaps not too much of a stretch to view the Midas
method as "price
POSTSCRIPT:
Article 6
was written on 4/25/95. In view of the delay in its publication, I thought it
might be interesting to see what happened to
Humana in the subsequent days. The results are shown in the fourth
figure. Support was found at the secondary level S2 (actual low for the day was 17 7/8; recall that we
plot the average price) and the bounce carried up through the incipient
resistance level R1. Humana is now
riding on a tertiary support level S3.
Category: Methods of technical analysis
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