Entry styles that require support or resistance to hold at a certain price level can be a nerve-wracking trade. The idea that the market will hold at a level that analysis has shown to be important does require a certain understanding of current volatility and the current momentum behind the market’s movement.
Think of it this way: It’s Newton’s Laws of Motion.
Source: http://en.wikipedia.org/wiki/Newton%27s_laws_of_motion
I think about this each time I enter a trade where there may be a support (or resistance level) I am watching that could hold. Of course there’s no guarantee that it will hold and there are trends on other time frames that could affect whether it does. So it’s important that I consider the “motion” which for us traders is the trend, on other time frames using my 34EMA Wave. Let’s look at a current example on the EUR/JPY.
The daily chart had been moving lower toward not only my 34EMA wav support at the 34 period EMA high, but also a Fibonacci Extension at 78.6% (A). The 34 period EMA high is in green. Notice that there was a pause between these two levels during the April 6th trading session but this morning the level(s) broke and prices moved lower to the 61.8% Extension (B).
The question inevitably is how do I know where this daily EUR/JPY will find support?
*Results are not guaranteed, individual experiences may vary. Past performance is not indicative of future results
The downtrend on the 60-minute chart has stayed intact as prices moved lower toward daily support. In fact, consider that without the downtrend on the intraday 15, 30, and 60-minute charts, there would be no pullback to Wave and Fibonacci Extension support on the daily time frame. I would use these smaller time frames - specially their market cycles - to gauge when and at what prices the daily may stall and/or reverse.
*Results are not guaranteed, individual experiences may vary. Past performance is not indicative of future results
The 60-minute chart has a mark down cycle but there was a brief amount of time where the 34EMA Wave did shift to a more sideways, distribution cycle. I feel it is important to notice that while the market psychology did shift, the 34EMA Wave was able to keep prices “contained”. Prices did not break higher through the resistance at the 34 period EMA high. This shows me that there was enough selling pressure to keep bulls from rallying the market. Since this held, there was a higher likelihood that prices would continue lower. Realize that until the 60-minute time frame can either break higher through Wave resistance or until prices can flatten out the market cycle to accumulation or distribution, the daily chart will not bounce off the Fibonacci Extension support levels. What is helpful is that at very least I know which levels to watch for support. I call these levels that I find through charting analysis “decision levels” because if I have done my analysis correctly, there should be some recognition of these levels are price approached. What was excellent confirmation of the Extension levels I drew are the lows that I have seen both today and yesterday. Price has confirmed that these are indeed “decision levels.”
If the intraday EUR/JPY is to slow and level out to a sideways market as prices have bounced off the 61.8 Extension on the daily chart, then the 60-minute chart will show support at the bottom line of the Falling Wedge pattern (S) at 124.63. Today’s current low is 124.59. Again, we’re waiting on a shift to a sideways market cycle or a break higher through the Wedge and Wave resistance between 125.82 and 125.95 on the 60-minute chart. In fact, due to the proximity of that resistance area to the 126.00 major psychological level, I believe it’s best to wait for 126.05 to be broken before getting long. Alternatively, if you’re already long based upon support between the 125.48 and 124.43 Fibonacci Extension levels, a break higher through 126.05 will be excellent confirmation of support being established.
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