Part II

Magnets: Support and Resistance

There are two types of magnets: support and resistance. When a magnet is below the market, it is a support level, which means that it is an area where bulls will initiate positions and bears will take profits on their shorts. When a magnet is above the market, it is a resistance level, which means that it is an area where bulls will take profits on their longs and bears will initiate shorts. Support and resistance are magnets that draw the market toward them. When you become aware of a magnet not too far from the current price, trade only in the direction of the magnet until after it is reached. At that point, you will have to decide if it looks like the market will reverse, go sideways, or ignore the magnet and keep trending. Magnets tell you the likely destination, but not the path, and there may be big pullbacks along the way. Also, the market might be in a trading range for dozens of bars, but within striking distance of a magnet. Although you should be aware of the magnet, there still can be reliable trades in both directions as the market decides if it will test the magnet and how it will get there.

Traders are constantly looking at support and resistance. The market has inertia and a strong propensity to continue what it has been doing. When it is trending, most attempts to reverse the trend will fail. For example, if the market is trending down, most support levels will fail to hold or reverse the market. However, all bull reversals ...

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