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 one 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. Think back about how many times have you seen 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 the book, Trend Qualification and Trading, the idea of "zones" were introduced to replace the notion of a line and a series of points.

Anchored support and resistance 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 congruencies or overlap of those bars provides anchors to the zone formations. Here's a visual example. Notice the overlapping of support zones (darker colors) and the same with resistance zones.

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 a swing point high or low.

Using these concepts, the TA Today charts provide the highest value anchored support and resistance zones for each time frame with a maximum of 3 of each.

That area on the chart has real significance. 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.

The creation of the anchored support and resistance zones are a critical component in timing and trend validation.