The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

THE HAnDbook of TECHnICAl AnAlysIs

27.2 Classification of Clusters and Confluences

static price Clusters

Overlays may be single price barriers or multiple overlay barriers referred to as

clusters or confluences. Price overlays, including price barrier levels like prior

support and resistance, indicate potential reaction levels or zones and are ex-

pected to unfold initially and primarily as reversals in price. These potential

reaction levels or zones are known ahead of time, and this allows for the early

placement of limit‐entry orders. There is no real ambiguity associated with these

reaction levels. They may be regarded as price‐static indicators since the prices

that they are indicating do not change over time, although there is a possibility

that they may be subsequently invalidated or overshadowed by more significant

reactions levels.

Here is a list of 13 popular price overlays and barriers that may form the basis

of price clusters:

1. Support and resistance levels or zones: Significant price inflection points and
   historical price extremes


2. Percentage‐based retracement levels: Fibonacci Retracements, Gann’s one‐
   eighth, 50 percent, one‐third, and one‐fourth retracements


3. Percentage‐based expansion levels: Fibonacci Expansions, Chart Pattern Min-
   imum 1:1 Price Objectives


4. Percentage‐based extension levels: Fibonacci Extensions


5. Percentage‐based projection levels: Fibonacci Projections, The ABCD (Mea-
   sured Move) Pattern


6. Retracement and projection levels: Gartley’s Pattern


7. Volatility‐based projection levels: Multiples of ATR and Standard Deviation
   Price Filters, Percentage of Price Filter


8. Algorithmically based reaction levels: DeMark’s TD Sequential Bar Count,
   Guppy’s Count Back Line


9. Pattern‐based reaction levels: Japanese Candlestick and Bar Chart Based Trig-
   ger Levels


10. Behaviorally based reaction levels: Psychological Numbers (prices associated
    with double and triple zeros)


11. Event‐based channels: Donchian Channel and Darvas Box Breakout Levels


12. Risk‐ and money management–based levels: Reward to Risk Ratio–Based
    Price Targets, Percentage Risk Targets, and Stop Levels


13. Mathematically based price projection levels: Gann Squaring of Price, Murray
    Math Lines, Floor Trader Pivot Points

The following charts are some examples of price clustering in action in vari-

ous markets.

Figure 27.6 depicts price approaching a resistive price cluster comprising a

one‐to‐one price expansion and Fibonacci 50 percent retracement level on the 3M

Co. Daily Chart.