Sunday, July 6, 2014

Signs Of Strength And Weakness

A common phrase used by Analysts is to watch for 'Strength' or "Weakness' and take action accordingly. Before action can be taken on the presence of strength or weakness, it is fair to ask: What is Strength and Weakness ? How can it be identified ?
           Strength and Weakness are associated with Support and Resistance. Markets will reach support, then hold it. Often, prices will touch resistance, then fail to cross it. The reverse can also happen, as the Market touches support, then breaks down to move lower, as also touches resistance then breaks out to move higher.

But the basic concept is:

Strength is Support holding out,not getting broken on the downside.
Weakness is Resistance holding out, not getting broken on the upside.

           Let me take an example. An intra day trader is waiting to buy on signs of strength. The Market is falling. He waits patiently. At some point, the decline stops, a trading range develops. The trading range is support. If prices move up from the range, this will be a sign of strength. The range also allows the trader to execute a low risk trade since a breakdown from the range is a clear signal that the trade is not working out.
            How do you identify a support in the making ? The answer is 'momentum'. As prices decline, momentum is on the side of the bears. At some point, the decline stops. Now, the bears do not have the benefit of momentum. This fall in downside momentum is the first sign that there may be support coming in. It could easily be just a pause before a new down move begins. That's not easy to predict. But then, it could also slowly lead to a trading range, then an upside breakout from the range. When this happens, the message is: there is support. This is a sign of strength.

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