The Law of Cause and Effect

Support/Resistance and the Law of Cause and Effect Support and Resistance surrounds our daily lives, and is in all trading. Everywhere. It’s at the core of just about every trading strategy that is used today, yet surprisingly not used by many traders. How many traders can clearly identify the S/R lines of a stock, or an option, immediately? In other words, it’s the core of how the market works, but most traders don’t correctly utilize these key areas. At www.bluechipoptions.com we calculate the support, resistance, and pivot point of a stock, or an option SEVERAL times a day. This is how we know when to day trade. The correct way to analyze a market is exactly opposite of what most traders do. At www.bluechipoptions.com we work entirely from the above premises. When demand is greater than supply prices will go up. When supply catches up to demand it reverses, and prices will go down. Support does not always mean “down,” and you’ll see it best as you learn that support lines can become resistance, and resistance can eventually become support. S/R are really just resistance to any general market direction. We care about the HIGHS and LOWS of a day first, because they represent best the limits of buyers and sellers that day. At bothwww.bluechipoptions.com and www.oexoptions.com all of our work is based around various calculations we use on the prior days Open/High/Low/Close price (O/H/L/C).[1] The strength of the S/R line is simple…its how many times the market has hit that price, and is part of what we call “the count”. Ex: If you have a price that has been tested 6 times as Support and another price that has been tested 4 times, then the market will likely break through the Resistance (4) not as strong as the Support (6). All things being equal…the market will always choose the path of least resistance. And, things aren’t equal all the time (news, overbought conditions, time of month)…so it’s learning the S/R around the trend that can make a trader real money…in anything traded! Here’s a simply tip: Multiply the number of times the issue has hit a S/R line by 1.5. If the level isn’t 5 or above it’s not likely strong enough to effect the market and can be ignored. Only when there are two or more spikes through a S/R line do we begin to “count” the trend. Proof? Watch to see a closing price beyond the resistance level that “holds,” and there’s high likelihood the directional bias has now been re-established. It’s a great tip. Prior day close is the issue…did the market hold the S/R lines, or was the close clearly above S/R lines?…if it didn’t, it’s a false break out and reversal is likely. [1] Using Charles Dow’s original point and figure charting (www.stockcharts.com offers an excellent tutorial on point and figure charting, and superb charts) we identify supply and demand, and the corresponding support and resistance lines that surround supply and demand, around the pivot point we calculate on yesterday’s actual O/H/L/C.