Technical Analysis Notes on Intermediate Trends and Support/Resistance Zones

Basic Observations

  • Price Movement and Economic Activity
    • Price movements reflect changes in economic activity over a typical 3-4 year business cycle.
    • Understanding primary trends is crucial, but intermediate trends also play a significant role in trading success.

Advantages of Analyzing Intermediate Trends

  • Identification of Turning Points
    • Changes in intermediate trends can signal turning points in the primary trend.
  • Cost Efficiency
    • Intermediate-term trading requires fewer transactions, leading to lower commission and execution costs.
  • Potential for Quick Returns
    • Intermediate trend reversals occur several times a year, allowing for the possibility of relatively high returns on capital if interpreted correctly.

Intermediate Cycles Defined

  • Primary and Intermediate Trends
    • A primary trend comprises five intermediate trends: three align with the primary trend, while two are countertrends.
    • In a bull market, countertrends manifest as price declines; in a bear market, they appear as rallies separating intermediate down waves.

Profitability of Intermediate Trends

  • Alignment with Primary Trends
    • Intermediate trends that move with the primary trend generally offer easier profit opportunities.
  • Random Nature of Minor Swings
    • Day-to-day price fluctuations are often random, making it harder to capitalize on them compared to intermediate trends.

Intermediate Movements

  • Cycles and Trends
    • Similar to primary trends, intermediate cycles consist of a primary intermediate price movement and secondary reactions.

Causes of Secondary Reactions

  • Investor Attitudes and Business Cycles
    • Primary trend direction is largely driven by investor attitudes towards future profits, influenced by the business cycle.

Identifying Primary Reversals with Intermediate Cycles

  • Typical Characteristics
    • A primary movement typically encompasses two and a half intermediate cycles but may vary in length and magnitude.
  • Influences on Prices
    • Four main influences: psychological, technical, economic, and monetary.

Characteristics of Final Intermediate Cycle

  • Volume and Price
    • Lack of volume increase above previous highs can be bearish during reversal phases.
    • Volume expansion during rallies in a bear market can signal potential reversal signs.

Support and Resistance Zones

  • Definitions
    • Support: Buying sufficient to halt a downtrend temporarily.
    • Resistance: Selling sufficient to prevent prices from rising for a duration.
  • Role of Support and Resistance
    • Support acts as a floor; resistance acts as a ceiling for prices.

Identifying Support Levels

  • Previous Highs and Lows
    • Look for previous lows for support and previous highs for resistance.

Major Technical Principles

  • Previous highs/lows serve as potential support/resistance levels.
  • Support can turn into resistance when breached, and vice versa.

Determining the Significance of Zones

  • Transaction Volume
    • Greater volume at specific price levels increases their significance as support/resistance.
  • Impact of Price Movement
    • The magnitude and speed of previous movements contribute to significance.

Trendlines in Technical Analysis

  • Construction of Trendlines
    • Down trendlines connect descending peaks; up trendlines connect ascending troughs.
    • Horizontal trendlines mark a series of identical lows or highs.
  • Importance of Trendline Penetration
    • Indicates either trend reversal or continuation; steeper trends signify a greater likelihood of consolidation.

Channels and Extended Trendlines

  • Trend Channels
    • Parallel lines can be drawn to form channels, indicating potential breakout zones.
  • Violation of Return Lines
    • Their penetration can indicate the acceleration of price movements within the channel.