Congestion zones between Support and Resistance levels are often marked by Amateur activity at the extremes. Amateurs see potential trend moves everywhere and love trading breakouts. Professionals, on the other hand, love fading the breakouts and “wrong footing” the Amateurs.
This activity is what marks support and resistance levels – creating a congestion zone – with Amateur bars and RAMBO (potential “Reversal of an Amateur Break Out”) patterns at the highs and lows.
Better Pro Am does a great job of signalling the Amateur bars trying to breakout above the top of the range or breakdown below the bottom of the range. These breakouts above and below support and resistance levels will fail unless they’re supported by the Professionals.
The right strategy is to wait for a “gathering” of Professional bars on the lower timeframes (500 or 1500 tick charts). Then jump on board as they resolve the congestion zone and transition into a valid break and trend move. You’ll know which direction to go by looking at whether the highs or lows of the Professional bars are broken. A break of the highs indicates an upside break and vice versa.
After this morning’s sell off we made a wide congestion zone between 1,272 and 1,276 – shown in the video above. The top and bottom was repeatedly marked with Amateur bars, false breaks and RAMBO patterns. The breakdown finally happened and the down trend move finished will Exhaustion selling and an End of Trend pattern.
Forget traditional technical analysis (like this old fashioned Wikipedia article) on support and resistance levels. It’s 2012 and we’re not plotting charts by hand any more. Get real and start using smart indicators like Better Pro Am to mark congestion zones and get the direction of the break right.