BASIC TECHNIQUES
Speed Resistance Lines
by Jayanthi Gopalakrishnan
Need to determine support and resistance? Try this.
It is not unusual to come across situations in which you see a market trending and think it may be too late to get in. To check, you wait for a pullback to determine if that might be a good entry point. But is this pullback a correction or a trend reversal?
FIGURE 1: SPEED RESISTANCE LINES. Speed resistance lines provide support and resistance levels by taking retracement levels into consideration. The two-thirds and one-third levels are important in creating support and resistance levels.
Determining whether a trend is going to continue or reverse is critical to a trader. Speed resistance lines, which were developed by technician Edson Gould, can help determine whether the market is correcting itself or a trend will reverse. These lines measure the speed of a trend by measuring the rate of ascent or descent. They are similar to Fibonacci fan lines, and you may have heard them also being referred to as one-third or two-thirds lines. Speed resistance lines are a hybrid of simple trendlines and Fibonacci retracement levels, and they are helpful in creating support and resistance levels.
IN THEORY
Markets in a strong trend will usually retrace at one point or another, giving you the opportunity to enter positions if you missed the opportunity to get in at the beginning of the trend or if you want to enter additional positions. Technicians are of the opinion that whenever there is a move in the opposite direction of the major trend, prices will retrace one-third to two-thirds of the previous move. Those of you familiar with Fibonacci numbers will notice the similarity to speed resistance lines. The one-third retracement level is the minimum retracement you can expect. At this level, you will see more trades enter the market, making the retracement level the primary support. If prices go below the 33.3% retracement level, then it is likely they will fall to the 66.6% level, which then becomes the second support level.
Jayanthi Gopalakrishnan is a Staff Writer for STOCKS & COMMODITIES.
Excerpted from an article originally published in the May 2000 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2000, Technical Analysis, Inc.
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