TechniTrader Stock Trading Beginners "Support and Resistance in Stock Charts"

Market Participant Groups Effect on Candlestick Patterns 


Any trader can have the periodic big gain trade, but it is the consistent trader who makes a living from the Stock Market. 
Recognizing Support and Resistance in stock charts is the foundation of good, profitable trades consistently over time.

Support and Resistance are relevant to both price patterns and Market Conditions. For example a Bottoming Market Condition has pent-up energy building, from the draw of liquidity by hidden Dark Pools buying bargain priced stocks in an accumulation mode. Therefore the resistance that would usually stall price or cause it to retrace, can be easily pushed through with momentum action.

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In the stock market today there are classic Dark Pool Buy Zone™ bottoming formations. The problem is that these bottoms are a collision between three powerful Market Participant Groups. 

Those three groups are the following:

1. High Frequency Traders driving price down with huge quantities of orders sent to the exchanges on the millisecond, that they generate an imbalance between the buyers and sellers which either gaps the stock or runs the stock.

2. Smaller Funds are in capitulation mode as they either sell to get out of what they believe is a total loss, OR they sell as the stock moves up assuming that they are getting a “better price” for the sell of the stock. This is similar to the foolish “Buy on the Dip” strategy during a Bear Market. In a Bottoming Market, selling into a bounce is a great way to energize the Dark Pools buying.

3. Giant Institutions using Dark Pools to accumulate, are buying into the final selling spree created by High Frequency Traders and their followers, who are the Smaller Funds and the Retail crowd. Buying the stock in larger lots than the other side is selling, halts the downtrend and commences the bottom. In addition liquidity shifts from sellers to buyers.

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Recognizing Support and Resistance in stock charts begins with these three important Market Participant Groups that collide in bottoms and in tops, with the winner always being the Dark Pools.

The chart example below has the Dark Pool Buy Zone outlined in green.
chart example of dark pool buy zone - technitrader

The momentum run down is Professional Traders. Their activity is technical and they are the easiest trade to ride with when momentum starts, as they always follow technical rules and they do not become emotional in the trade. Their Volume is moderate as their average trade size is 10,000 to 50,000 shares.

A Dark Pool Buy Zone in the collision area, will generate a lot of what appears to be impassible resistance. However what most traders fail to remember is that the “Buy Zone” is a buying zone, where their Time Weighted Average Price orders trigger intermittently set on Time and Price rather than Volume and Price.

The huge Volume surge in the top indicator window, is a day of High Frequency Traders heavy order flow. The High Frequency Traders was attempting to sell down, but instead Dark Pools reacted to the sell and started triggering Time Weighted Average Price buy orders.

The momentum energy from the Buy Zone creates a three day Velocity Run, which is the favorite kind of run for Swing Traders.

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chart example of momentum energy from the buy zone, three day velocity run - technitrader

The Velocity Run shifts to profit taking, as Smaller Funds and Retail Traders rush to buy the stock after the run is already well underway. Profit taking creates a shift to a sideways pattern, which is a Platform Candlestick Formation.
chart example showing dark pool buy zone with three day velocity run turning into a platform formation - technitrader

It moves up as Platforms commonly do after a resting, high range compression. This is not going to be a Swing Style Trade at this point though, because the buyers at this level are Giant Institutions using Dark Pools once again in accumulation mode. Professional Traders have moved on, because of resistance.

full chart example of dark pool buy zone, three day velocity run, and resting platforms - technitrader

On the Weekly View chart the Technical Resistance is evident, and is the reason why the Professional Traders Market Participant Group have not continued to trade heavily. Volume over several weeks slips to a much lower level, and the Accum/Dist Indicator in the bottom window starts to float.

Summary

When a trader understands who is controlling price, then Recognizing Support and Resistance in stock charts and how it will behave, becomes easier to determine. Technical Support is created by Technical Traders. Fundamental Support is created by the Fundamental Investors who are the Giant Institutions.

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Trade Wisely,

Martha Stokes CMT
 

TechniTrader technical analysis using StockCharts charts, courtesy of StockCharts.com


Chartered Market Technician
Instructor & Developer of TechniTrader Stock and Option Courses

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