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Getting Started With Technical Analysis-4
Getting Started With Technical Analysis-4
Figure 4.26
Resistance zone defined by concentration of prior relative highs and lows:
crude oil nearest futures.
Note: = relative low; = relative high.
Price Envelope Bands
Another method of identifying support and resistance levels is the price envelope band, which is derived from a moving average. The upper boundary of the price
envelope band is defined as the moving average plus a given percent of the moving average. Similarly, the lower boundary of the price envelope band is defined as the
moving average minus a given percent of the moving average. For example, if the current moving average value on a stock chart is 100 and the percent value is defined
as 3%, the upper band value would be 103 and the lower band value would be 97. By selecting an appropriate percent boundary for a given moving average, an
envelope band can be defined so that it encompasses most of the price activity, with the upper boundary approximately coinciding
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Figure 4.27
Resistance zone defined by concentration of prior relative highs and lows:
deutsche mark continuous futures.
Note: = relative low; = relative high.
Figure 4.28
Resistance zone defined by concentration of prior relative
highs and lows: Aetna Life.
Chart created with TradeStation® by Omega Research, Inc.
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with relative highs and the lower boundary approximately coinciding with relative lows.
Figure 4.29 illustrates a price envelope band for the March 1994 Tbond contract using a 20day moving average and a 2.5% value. As can be seen, the price
envelope provides a good indication of support and resistance levels. An alternative way of expressing the same concept is that the price envelope indicates
overbought and oversold levels (see Chapter 6). Price envelope bands can also be applied to data for other than daily time intervals. For example, Figure 4.30
illustrates a 1.2% price envelope band applied to 90minute bars for the same market shown in Figure 4.29 (but of course for a shorter time period). Bollinger Bands
are a wellknown version of price envelope bands; they simply add and subtract a standard deviation calculation instead of a percentage calculation from a moving
average.
It should be noted, however, that the price envelope is not as effective a tool as it might appear to be. Although it provides a reasonably good indication of when the
market may be nearing a turning point, during ex
Figure 4.29
Price envelope band as indication of support and resistance in daily bar chart: March
1995 Tbond.
Source: FutureSource;
copyright © 1986–1994; all rights reserved.