How to Interpret Stock Trading Benchmark Levels - dummies

How to Interpret Stock Trading Benchmark Levels

A new one-year high or low in the market has no analytical value to the technical trader — unless it’s also an historic high or low. An historic high or low is an absolute level that becomes a benchmark.

Here are a couple examples of historical highs:

  • The S&P 500 at 1553.11 in March 2000 that wasn’t bested until October 2007 at 1565.42

  • The all-time high in spot gold at $850 in January 1980, not surpassed until 2010

When a price makes a new historic high or low, and then retreats in the other direction, years can pass before the benchmark is matched again. In the meantime, intermediate highs and lows emerge and become benchmarks in their own right. At the time they occur, they seem “historic.” After a bounce up off a new low, traders hesitate to break it, but after they do, the price accelerates to the next low. The same thing happens on the way up to new highs. Profit taking after a high causes the price to dip, and traders hesitate to breach the new “historic” high.

Historic levels are magnetic — they attract some traders to try to break them — but they are also barriers. Hesitation ahead of the breach of a benchmark price can be prolonged, demonstrating that traders are fully aware of “historic levels.”

Historic levels are a cause and an effect of strange indicator behavior. If an uptrending indicator such as the moving average flattens out mysteriously, widen the time frame on your chart to see whether the price is near an historic level. The market is going to test the old high:

  • If the test fails, expect a retracement and maybe a reversal.

  • If the price passes the test and makes a new high, you expect the price to accelerate with high momentum and deliver a juicy profit.