Evidence-Based Support & Resistance by Melvin E. Dickover
Elementary, My Dear Chart!
Here are two new indicators based on evidence from price–volume behavior to help create dependable support and resistance lines that accurately identify the prices where supply and demand pools are located.
It is well known that price movements are caused by changes in supply and demand. Pauses, consolidations, pullbacks, and reversals are caused by encountering pools of supply or demand that must be absorbed before price can move past them. It is these supply and demand pools that are the underlying cause of support and resistance.
Conventional support and resistance indicators are calculated from various price formulas based on hypotheses about price behavior such as floor pivots and Fibonacci lev-els. Because these formulas ignore volume, the support and resistance lines they compute are only proxies for the actual location of the supply and demand pools that create support and resistance. This article describes how a new indicator I named Defended Price Lines (DPLs) can exploit price and volume data to pinpoint the location of supply and demand pools. DPLs indicate where resistance caused by supply or demand has been found and will be found again and again.
FINDING DPLS WITH RELATIVE VOLUME
Using simple statistical methods, we can find significant vol-ume differences — those that make a difference to our trad-ing. The relative volume indicator finds where an unusually large volume suddenly comes rushing in to defend the price.