Articles

Anchored Support and Resistance

Traditional technical analysis addresses the concepts of support and resistance as lines and points on a chart. This is very misleading and problematic. The stock market is not nearly that well behaved.

A secondary problem is that the only measure of oneĀ support or resistance line being better than another is conditioned on the idea of how many times the line is "tested". This also is problematic and not very useful. How many times have you see a support line violated and price head back the other way? In most cases, the technician just redraws the trend line to include the previously violated one. Unfortunately, the market doesn't give you your money back had you placed your stops just under that trend line.

In his book, Trend Qualification and Trading, L.A. introduces the idea of "zones" to replace the notion of a line and a series of points. Anchored zones, as the support and resistance zones are formally referred to,offer a range where buyers (support) or sellers (resistance) should show up. Anchors refer to the bars on a chart that are known to have significance and the congruences or overlap of those bars provides an anchor to the zones.

The creation of the anchored support and resistance zones are a critical component of timing and trend validation and it is with zones that L.A. leads us to another level.

For support and resistance to have real value, they need to be anchored with significance. Significant action on a chart is found in three ways - high volume, wide price spread, and in gaps. Using these concepts, L.A. creates anchored support and resistance zones where the anchored zones are formed from high volume/wide price spread/gap and swing point formations to create an area on the chart that has real significance. He argues, rightly so, that anchored support and resistance zones have a much higher probability of having significance and truly acting to support or resistance further price movements as compared to traditional technical analysis methods.