Numbers: The Rule of 10s
Support/resistance has many faces. Trendlines, prior price
extremes and hidden Fibonacci levels all swing market momentum back and forth. Another
lesser-known set of numbers also provides excellent support/resistance feedback and unique
trading properties. This price series bases off the common decimal system of 10 and
tenths. And you need look no further than your fingers and toes to understand their logic.
Markets consistently shape patterns involving whole number
logic. In fact, unique crowds tend to trade within each increment of $10 in valuation. An
easy way to understand price volatility at whole number levels ($10, $20, $30, $40, etc)
is to view it as an exchange of positions from one crowd to the next. As prices slowly
evolve from resistance to support (or vice-versa), predictable swing elements appear.
Traders can create successful entry strategies that capitalize on these dependable
As prices approach round levels, classic congestion
patterns develop with upper (or lower) boundaries limited by the market number. The
character of the prior trend slowly evolves into a period of quiet position squaring,
frequent testing and small retracements. This area of consolidation represents an
important activity zone for the swing trader. Fade strength and buy weakness until broader
conditions tell a different story.
Measure the reduction in price volatility to locate the
climax for this redistribution process. Classic signs include a sharp drop in price rate
of change and the appearance of narrow range price bars. Stay alert in this quiet zone.
The new trend can emerge very quickly.
This narrowing of price movement may be hidden by wide
price swings that fool the traders eye. Use more sophisticated technical indicators
to uncover a strong signal hidden beneath this price "noise". These measurements
take off as the stock emerges past resistance, opening the door for the breakout trader to
follow the emerging trend.