Stocks & Commodities V. 24:10 (97-98): At The Close by Dennis D. Peterson
Trying to anticipate market support and resistance requires practice and knowing a few rules. Let’s take a look at the QQQQs. First, it’s obvious from Figure 1
that at this point, the QQQQs are in a downtrend or at the very least a downswing, especially if you apply zigzag. Zigzag (red line going through price chart) helps you see only the “significant” movement while eliminating the noise. In this case, noise was defined to be any price movement less than 2%, while 2% was deemed significant.
I used the open prices because visually it looks correct to me and that’s what I want from zigzag—a visual cue.
With the strong downward move between points 1 and 2, you might think that the relative strength index (RSI) would surely bottom out. RSI, which uses the ratio of up
days to down days, in this case over the last 14 trading days, gets close when it reaches 23.8. What’s the deal? The deal is that when you look at statistics of up and down days, the market tries to strike a balance. It also has a lot fewer sequences of three down days in a row than two down days in a row. Similarly, for up days there are still fewer four days in a row than three, and so forth. This explains why stochastic RSI is a better
indicator in many aspects.