There are many ways to project future support or resistance levels. This information can then be used when setting entry and exit prices. One of the easiest methods is to just look in the past. Prior swing highs and lows can provide valuable information when a trader is unsure of where to enter or exit a trade. The December Silver futures has recently offered a few great examples of how a market may react when it reaches price levels set by a prior swing low or swing high. For example, December Silver posted a swing low price of 17.855 on August 11th. This low was followed by a four-day rally to test the prior swing high of 18.75 posted on August 4. However, Silver fell short of reaching the objective and only traded as high as 18.67 before turning lower. Five days later, Silver dipped below the August 11th swing low price of 17.855 and traded to a new low of 17.785, but closed the session 18.42… an “outside day”. Silver had tested and breached the prior low but could not find any new sellers, a clear sign the corrective pullback was over and upward trend was about to resume. Whenever, a market tests a significant swing low and cannot sustain the new low, it is can be considered bullish price action and the beginning of a possible market reversal.
Another example of this price behavior appears when December Silver finally breaks above the prior swing high of 18.675 and 18.75, when it traded to a high of 19.09 on August 25 and closed near the high of the daily price range. The market cleared the prior swing highs on a show of strength and closed above the previous resistance level. This price action was considered bullish and suggested Silver was poised to continue higher with a future price objective at the previous swing high of 19.335, posted on June 28. That is exactly what happened! Two days later, December Silver traded to an early session high of 19.375, before profit-taking pressured the market and Silver fell all the way back to close at 19.07. That’s a 30-cent pullback after penetrating the prior high. Understanding how the markets behave around previous swing highs and lows could have added an extra 30-cents to the trader’s bottom line.
John Crane
