Resistance Levels For Intraday Trading

As helpful as Pivot System levels often are a significant drawback to their use lies in the fact that they are calculated from the prior day's price action, and may not accurately reflect recent changes in market psychology. Effective intraday trading also requires a means of identifying support and resistance which can more easily adapt and more accurately represent price activity under rapidly changing market conditions. The 20 period Exponential Moving Average (20EMA) can be used to create these more dynamic levels of support and resistance.

Unlike Pivot System S&R levels that remain constant throughout the day, the 20EMA changes in accordance with more immediate changes in price. This feature makes them a very effective tool, especially when significant shifts in market psychology occur between Pivot System levels, and after large thrusting impulse moves. My principle intraday chart reference is the five minute timeframe with frequent note of other periods as market conditions warrant. For this reason, the 5 min. 20EMA is our most often referenced moving average.

However, it is also helpful to additionally graph both the 15 min. and 30 min. 20EMAs on the same 5 minute chart. This is accomplished by plotting the following values.

5 min. 20EMA - plot a 20 period Exponential Moving Average.

15 min. 20EMA - plot a 60 period Exponential Moving Average (15/5*20) 30 min.

20EMA - plot a 120 period Exponential Moving Average (30/5*20)

It is important to recognize that the 15 and 30 minute values arrived at with this method are not exact and precise representation of the corresponding 15 and 30 minute 20EMAs, but for purposes of identifying potential support and resistance levels, you will find the technique quite useful.

The 20 period EMA is treated as we would any other potential support or resistance level. In congested, trading range market conditions, these levels can be violated rather easily. However, when price begins to trend, the 20EMA can be a valuable aid in determining appropriate areas in which to take action either by establishing new positions or baling out of existing ones.

One of the more frequent uses of this indicator comes into play when we began a particular trading day expecting the trend established in the previous day to continue. A common strategy on such days is to look for an opportunity to enter on the first retracement move which takes price back towards a likely support or resistance. The first level of support or resistance encountered is likely to be that of either the 5 minute 20EMA, the 15 minute 20EMA, or the 30 minute 20EMA (chart above right). It is important to keep an eye on these levels when we are expecting trend continuation. Once a trend has been established, it is very often the case that one of these levels will contain the price action quite effectively.

The 20 period EMA can also come into play immediately following large news-driven price thrusts. Trading conditions can often be so volatile during such periods that I generally discourage any sort of participation until the initial hysteria subsides. Typically, the strong impulse thrust that accompanies such events are the beginning statement in a new trend move.

Such price behavior will usually undergo some sort of retracement activity before an advance of significance takes hold. Again, the 20 period EMA is an excellent tool for gauging the degree of retracement and likely return to the trend. As stated earlier, the dynamic characteristics of the 20 period EMA is what makes the indicator such an important tool. It's ability to react in accordance to more immediate changes in the market environment make it a valuable aid in creating structure out of essentially unstructured events.