Support and resistance levels!

[gd.shepherd]

Hi everybody,

I started studying Technical analysis books to time the market. One thing that used to bother me and prevented me from reading it earlier were support and resistance levels.

Let me discuss a hypothetical scenario, Say a stock had a support of Rs 100 last year at the same time and now the stock has peaked at Rs 200 and trending downward and next support level is again at Rs 100.

In the context of money, money of Rs 100 last year would have the purchasing power of Rs 110 now assuming a inflation of 10%. In this context I find it very hard even to compare the price levels and simply assume the same price as support irrespective of macro-economic changes like inflation.

My guess is, in the absence of anything substantial to time the market, these tools have become self-reinforcing i.e. more people believe in this and thus those levels hold. Am I true or am I missing something?

Shepherd

 

[SavantGarde]

You hit the nail on the head......Yes the herd mentality.

There is another line of thinking I have pursued in the past...will try and outline that in the future...!!!

SG

My guess is, in the absence of anything substantial to time the market, these tools have become self-reinforcing i.e. more people believe in this and thus those levels hold. Am I true or am I missing something?

Shepherd

 

[gd.shepherd]

Thanks SG. With books being written on TA, I thought I would be odd man out questioning it.

Eagerly look forward to your new thoughts.

Shepherd

 

[SavantGarde]

Hi Shepherd,

Frankly, I don't own even one book on TA....just wanted to know and learn few things without getting my head into a wet scramble...)
Though I did receive a Van Tharp E-book...started it several time (each time from the beginning.. ) but never got beyond 26 odd pages.

Questions that plagued me was that nothing in the market is at Fair Value...it is either way below or way above..... & so who is responsible for it...!!!

Answer I found was that everything including Index is manipulated...and (pardon me for the lack of a more suitable word) 'blame' kept finding itself at the doorstep of the FIIs & DIIs

That led me on a quest on trying to find what & why ..... they were buying & selling, Luckily it didn't take very long to find the answers...considering my fascination for numbers.....

Shall try and find the links to some posts on How...I got started with trading et al...... should make for an interesting 15 minutes of reading.

SG

Thanks SG. With books being written on TA, I thought I would be odd man out questioning it.

Eagerly look forward to your new thoughts.

Shepherd

 

[gd.shepherd]

Thanks SG.

I found it hard to understand the markets. Especially when I was trading Gold through OTC derivatives (I hope that is the right term). Given that gold bull market is continuing over 10 years, how good it is to assume support and resistance levels. In these two years more than 3 trillion has been printed out by US, I wonder how could anything be same before and after. May be I am just ranting as I could not cash in on that.

Shepherd

 

[NTrader42]

Hi shepherd

The S/R work because of the quest for breakeven, if you have held on to a stock for few years that has traveled into -ve territory, you will immediately empathize with this quest for getting out at BE.

Small things like inflation and few years of lost opportunity cost does not matter in front of the immense satisfaction the ego gets from getting out at BE

Jaan bachi lakhon paye, laut ke buddhu ghar ko aaye

Thanks

 

[gd.shepherd]

Agree with NTrader42. Support and resistance are part of psychology of the market in an effort to quantify the (non-)randomness of the market and rationalize the decisions to buy and sell. The fact that sometimes that they do not hold is because every individual is looking at the same data on different time frames, following different indicators, interpreting charts differently or even following a different method like Elliot wave.

Shepherd