Stocks & Commodities V. 2:2 (60-65): Price, Action and Resistance by Jesse H.

Thompson

Price, Action and Resistance

by Jesse H. Thompson

Origin, History and Recent Price Action

We can not obtain a full account of the "present position" (price potential), of any given stock or
commodity without a review of its recent price origins, price history and price action. And a wider
perspective is possible only by considering a greater time frame than is normally provided in the limited
space of most chart services. Hence, the great value in keeping your own longer term charts on each
vehicle you monitor.
The cycles of supply and demand are characteristically shorter for commodities than stocks both because
commodities are so much more perishable and because the consumer demand for them is more
immediate. The great secular movements of supply and demand usually run 2-4 years in commodities and
much longer in stocks.
In this article, we will analyze the "present position" of the November 84 Soybean contract relative to
price origin, price history and recent price action.

Price Origins and History

The first point of price origin that is relevant to the "present position" dates back to the last pulses of the
most recent secular bear market low. This point is the 518 major low which occurred on 4 Oct 82 in the
November 1982 contract (Chart A, Point A). Note that 518 was the final low of the major bear market
extending downward from the 930½ major top of 5 Nov 80. This great bear's price history consisted of
five great swings downward, culminating at 518. The price history after the 518 low consists of two great
swings up to the 968½ major top of 13 Sep 83 (Chart A, Point B).
The downturning from the 968½ top, and the subsequent reaction establishes the 968½ top as the second
major point of origin relevant to the "present position".

Establishment of a Major Price Range

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These two points of price origin, 518 and 968½, establishes the Major price range which is relevant to
the measurement of the "Present position".
Trend development is manifested by the repeated shifting of supply and demand from a state of balance
(consolidations within a range) to a state of imbalance (movement out of a range and the ensuing price
run), and then back again into balance. Price action is always relative to some pre-established range.

Measuring Weakness or Strength Within Range

W.D. Gann called the 50% or half-way point of a price range the "balancing point" because it divided the
range into two equal parts. He considered the ability of price to hold above this level a sign of strength,
while the inability to hold or attain this level was a sign of weakness.

Chart B shows the high and low that defines the major range from 518 to 968½ for the most recent bull
market. It also indicates the 50% level within this range (743¼). We will consider the ability of price to
hold this level as indicative of strength, and the inability of price to hold or attain this level as indicative
of weakness.

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Price History: Weekly Swings

Chart C illustrates the weekly swings in price superimposed on the major range. At the top of Chart C,
the weekly swings are shown continued after the 968½ top until the expiration of the November 1982
contract. The lower swing chart (Chart C) illustrates the continuation of the November Soybean contract
in the form of the November 1984 contract.
Note the action of the November 1984 Soybean chart relative to the 50% level. Since January, it has
illustrated the inability to attain and hold this important balancing point. If later in the year, the
November 84 contract can penetrate and hold this level, it will be a sign of higher prices and a test of the
contract highs around the 770 level. A demonstrated inability to attain this level, would be viewed as
bearish.

Recent Price Origins and History

The important pivotal prices established solely by the trading of the November 1984 contract can also be
viewed within the context of most recent price origins and price history. Reviewing Chart D, we see that
a low was established at 671 shortly after trading commenced in this contract.
Next price history shows a top was established at 772¼ and then a subsequent low at 661. Since the 661
low, the major range established by points of origin and price history has been between 661 to 772¼.

Natural Resistance Within Range

The study of price resistance is the study of proportion and numerical progression. It is the application of
proportion to the range or space defined by the fluctuations of commodity or stock prices. Some
technicians of today make the assumption that the rules of proportion and numerical progression
observed by scientists in such fields as botany, crystallography, conchology, and those same relationships
utilized by artists in the great works of art and architecture, have an application as well in the
measurement of price resistance in stocks and commodities.
In the apparently irrational spheres of speculative markets this also implies that more order prevails in
price fluctuation than is commonly assumed. Many "resistance systems" marketed today are applications
of the concept of proportion to price resistance.
Aside from the commonly known 50% price level, there is the "Phi" relationship of range which is
developed from the numerical and angular relationships prevalent in myriad form in nature. This Phi
relationship can be used to divide space (such as a price range) into counterparts of .618 and .382. W.D.
Gann referred to the .618 level as "the important 5/8ths level". He stated that the 5/8ths level was a very
important level to watch for a top. The "62% retracement" referred to in some technical textbooks, also
has its origin in the Phi relationship.

The Application of Resistance

The action of price at or near resistance levels tends to manifest itself either in vibrations around these
levels, or in sudden reactions from them. The ability to measure price weakness or strength by price
action at or near these levels can be of great value. Natural Resistance in range (space) defines an area
where the trader should be alert to the pivotal points that may change the trend. Resistance can be
sometimes used for the taking of profits (exiting), but it is best to wait for a change in trend before
entering the market at these levels. The establishment of a top or bottom at these price levels makes that

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particular top or bottom a more important and critical price level.

November 84 Price Range

The 661 to 772¼ price range established to date by the November 84 contract establishes the .618 level
within this range as an important pivotal price level. The swing chart pictured by Chart E illustrates the
"toppy" action thus far occurring at the .618 level (which is 730). Rallies have so far been failing at the
.618 level.
Looking at Chart F (the daily activity chart), we can clearly see the rallies faltering at the .618 level and
the concomitant support of price around the .50 level (6972) between the 7334 top and the 661 bottom
(see Chart F).
The .618 level at 730 and the .50 level at 697¼ define a pivotal price range by which we can measure
strength or weakness. Breaking the .50 level would imply a test of the contract lows at the 660 level.
For price action to reestablish a bullish potential and test of the major 50% at 743½ (Chart C) price must
regain and hold above the .618 level at 730, and illustrate support above the old tops at 726½,729 and
733½.

Trend Action Confirmations

With price action displaying a bearish taint at the important .618 level (which Gann said to watch for
important tops), does trend action confirm this area as an important top? Chart G illustrates the main
swings in the November 84 contract since the 661 low. Note that for the first time since the 661 low was
established, we have a clear indication of a lower top at Point A and a lower bottom at Point B, with a
penetration of the last swing bottom of 710½ by a full 10¢ as of the week ending February 10, 1984.
Also, price has closed at least twice on a daily basis below the swing bottom of 710¼. This trend
development will be CONFIRMED IF THE 6964 BOTTOM IS PENETRATED.
This swing chart clearly shows a change in the character of the price structure. This change to lower tops

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and bottoms denotes a developing trend towards lower prices. However, this scenario is quickly aborted
if the 724¾ and 733½ price levels are penetrated to the upside.
This trend action top at 733¾ has been given added importance because of where it occurs. The top at
733¼ is at the .618 level, which establishes this price level as pivotal.

Potential Tests
If price can reaffirm itself and take out the tops at 724¾ and 733½, a test or reaction back to the 743 4 or
770 level is a high probability. If the test of the bottom of the range at 697 2 (.50) occurs, then it is likely
that some demand may reoccur at this old level and create a rally (if not a time-consuming consolidation
at or above this level). If this test of 6972 is successful, then there will be an attempt to retest the 733½
high. If this retest is unsuccessful, and price penetrates and fails to hold the 6972 level, this will be strong
evidence of further decline to test the 661 contract lows. (See Scenario Charts H-J)

Summary
An analysis of price origin, price history and recent price action taken on a major and minor basis can
give the trader a much clearer view of the "present position" of a stock or commodity. By a combination
of measuring price action at or near important natural resistance levels, and analyzing trend action, the

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trader can pinpoint the beginnings of major swings, and thus establish areas of entry into the market
based on the breakdown or penetration of ranges at pivotal levels.
Relative to this analysis of Nov 84 Soybeans we have been able to define 661, 697¼, 733½, 743½ and
772 as pivot points to watch for trend action and resistance or exit and entry.
Jesse H. Thompson is a professional trader and technical analyst. His emphasis is on soybeans, gold and
bonds. He also gives individual instruction in technical analysis and speculation.

CHART A:

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CHART B:

CHART C:

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CHART D:

CHART E:

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CHART F:

CHART G:

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CHART 1:

CHART 2:

CHART 3:

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