Although it can be hard for me to remember, there was a time in my life when I could actually live without this thing called the Internet. Maybe that’s why I like to watch YouTube videos about retro hardware / software and other interesting goodies from the 80s and early 90s, a time free from such niceties as cell phones, home networks, and the headaches associated with these when they stop working. This past week I was hit with a double whammy of a bricked cell phone and a home network that decided to stop working. Happily, I was able to get both issues resolved without destroying was left of my office furniture. The android phone became nonfunctional when the battery died during an OS upgrade that apparently started without my knowledge, and my home network became isolated during a router upgrade because the builder who built my house installed a phone jack in the office that was mechanically compatible with the computer network jack, (although it shouldn’t have been and was the only jack in the house like that) and mounted on the same wall plate which allowed me to foolishly plug the main network switch into the phone line. Grrrrrrrrr! Happily all is back working again. Anyway, the problem was resolved so we can continue looking at moving averages and how they relate to support and resistance levels.
Take a look at the one hour EUR/USD chart below:
On the chart above we see a pair of non-intersecting moving averages: A 20 EMA high (blue line) and a 20 EMA low (orange line). On the left side of the chart you can see price action, after being flat for a few hours takes a nice spike and then crashes through the 20 EMA low. Then continuing sideways a bit until price almost touches the orange line and continues downward. A few hours later the orange line is breached, price move sideways and continues to move down again. What we are seeing here is an example of resistance to the orange line. But before I continue, let’s look at support and resistance in general.
Support and resistance by definition is the concept that price action will stop and reverse at certain price levels. Basically we have two forms of support and resistance: static and dynamic. Look at the one hour EUR/USD chart below:
In this chart the top dotted red line represents an area of resistance, as price tends to reverse when it nears or crosses it. On the bottom of the chart the solid red line shows an area of support, where again, when price action comes near or touches it, it changes direction. These are examples of static support and resistance. In addition to horizontal lines, other examples of static port levels are pivot points, trend lines, and Fibonacci levels.
Now look at the one hour EUR/USD chart below:
Again, the blue line is a 20 EMA high moving average and the orange line is a 20 EMA low moving average. Bullish candle A bounced off of the orange line and price action continued up until it touched the blue line, and reversed again, leaving price mired in the channel between the 20 EMA high and low. Candle B makes a breakout, and now what was resistance has now become support as price action rides above the 20 EMA high line. After several hours price action breaks through the blue EMA, consolidates for a time around candle C, then a few hours later breaks through the 20 EMA low. A few hours later a break out to the high side peaks around candle D and continues to ride above the 20 EMA high to break out on the downside by candle E. Price action continues to trend below the 20 EMA low for several more hours. Price action support (price above the blue line) and price action resistance (price action below the orange line) are examples of dynamic support and resistance. Some examples of dynamic support and resistance would be price channels, moving averages, linear regression, etc.
That’s all for now – in part two will look at what all of this is trying to tell us on the chart in regard to forecasting price action. Until next time take care and happy trading!