Stocks & Commodities V. 8:3 (112-113): Resistance by Arthur A. Merrill, C.M.T.

Resistance
by Arthur A. Merrill, C.M.T.

Prices, like everything else move along the line of least resistance. They will do whatever comes easiest
therefore they will go up if there is less resistance to an advance than to a decline and vice versa.
—Edwin Lefèvre, in Reminiscences of a Stock Operator

I f the market has low resistance to advances and strong resistance to declines, prices move up rapidly.
When resistance to the advance builds up, prices slow down and finally reverse when the resistance to
advance exceeds the resistance to decline. If the market then exhibits low resistance to the decline, prices
fall rapidly.
In other words, the direction of prices and the speed of advance or decline are determined by the
difference between the resistances. Resistance can be measured by the volume of trading required to
move prices one point. It's the number of shares traded per point change.
To measure the difference between resistance to advances and declines, I developed an index some years
ago that subtracts the resistance to advances from the resistance to declines, so that high figures are
bullish and low figures are bearish. With a computer, I looked at each of the hours in the week and
subtracted the shares per point in the rising hours from the shares per point in the declining hours.
The formula for the basic resistance index is:

  A   C
RI = 1000   - 1000  
  B     D 

Where:
A = Total of average hourly volume in the declining hours in a week
B =Total of average hourly price changes in the declining hours
C =Total of average hourly volume in the advancing hours in a week
D = Total of average hourly price changes in the advancing hours in a week
The multiplier of 1,000 puts the index into a convenient integer form.
To smooth the index, I use a 14% exponential average, which approximates a 13-week simple moving
average. To simplify interpretation, I then divide the average by the standard deviation, so the index is
then a number of standard deviations from the mean. Statisticians call this "Z," the number plotted in
Figure 1.
You can program your computer to do the job, but it will require entering hourly price and volume data.
The index for the Dow Jones Industrial Average (Figure 2) is published weekly by Technical Trends.

Performance

Article Text Copyright (c) Technical Analysis Inc. 1

Stocks & Commodities V. 8:3 (112-113): Resistance by Arthur A. Merrill, C.M.T.

How well has this indicator performed? A test showed that the best performance was in forecasting the
direction of the market for the next 13 weeks. The chi square score for this time period was rated
"significant." The indicator didn't do as well for shorter or longer time periods.
In Figure 1, note the slide that started in June 1987, just a few months before the stock market tumble.
Also, note the slide that started in June 1989 foreshadowed the recent 8% decline. Here is another
indicator worth watching.
Arthur Merrill is a Chartered Market Technician and the author of many reports and books including
Behavior of Prices on Wall Street and Filtered Waves, Basic Theory.

References
Technical Trends, P.O. Box 792, Wilton, CT 06897, (203) 762-0229.

FIGURE 1: The resistance index, smoothed here with a 14% exponential moving average, measures
the difference between resistance to advances and declines, where high figures are bullish and low
figures are bearish.

Figures Copyright (c) Technical Analysis Inc. 2

Stocks & Commodities V. 8:3 (112-113): Resistance by Arthur A. Merrill, C.M.T.

FIGURE 2:

Figures Copyright (c) Technical Analysis Inc. 3