Iron Condor – Trading Options Video 26 part 4

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This was a fairly significant resistance level, at the 1000 level, that took place here. It took a very long time to break through it.

Do I think it’s going to take that long to break through the 14,000 level this time? Probably not. It seems like every time we hit a new resistance level, the time that it takes us to break through that level, above that level, consolidates. It is shorter and shorter. This time, a significant level was broken through at the 10,000 level, and it only took about a year and a half to do that.

Another resistance level, at 11,500, was also broken through in less than a year. I don’t think that it’s going to take that long to break through this 14,000 level, if we can break through it. Remember, whenever there is an exuberance in price here, there is always a back-off and a consolidation.

How long we’re actually going to be in some sort of consolidation phase, going between 13,400 and 11,500, I have no idea. It could take years before we get out of this consolidation area, and we attempt to break through 14,000.

I am pretty sure of one thing. If trend in history is our guide, eventually, we will rise up to that 14,000 level, and we will break through it. We will have another exuberant run-up in prices. It seems as if every time we break through these significant resistance levels, we have an exuberant run-up in prices.

We did it here. We did it here, and we did it here. Prices just blasted. We did it here. We had tremendous bull markets after breaking through significant resistance points. My point in all this is simply to give you a basis and framework for making a decision and having an understanding of where prices have come from, and what is significant about the price at the current moment.

If you don’t know where you’ve been, in other words, how do you know where you’re going? That’s the idea. The idea, too, is that you should do some historical research on the price of your stock. Prices are personal to the individual that bought or sold at those levels. In other words, if you purchased the stock at $20, and now it’s at $10, you’re going to be feeling some pain, because you have lost money. When it attempts to rally back up to $18 or $19 again, you may decide, “Hey, I’m almost whole. I can get my money back. I’m going to sell, as soon as it gets close to $20.”

That’s what causes these types of resistance points. If they bought here, all the way back down here, if they come close to that level again, they can sell and get whole. They can sell and get their money back. That’s exactly what happens, most of the time, in most of these stocks.

On the indexes, you want to take a long-term historical perspective, at least to have the understanding that the significant up and down movement of prices is pretty much par for the course. Prices go up, and prices come down. Like I mentioned in the beginning of this course, there are only 2 truths to the market. As far as stocks go, they will fluctuate in price.

Determining the direction of markets is really an art. You don’t need to determine markets in order to be successful in the markets. You don’t need to know where prices are going to be headed all the time. The couple things that you do need to be aware of are support and resistance points, in which prices have backed off from significant prices, just to get an idea of what will happen to your position. The idea here is to manage your risk.

In order to manage your risk, you need to know where these support and resistance points are. They are not always intuitive. The way I draw support and resistance points is simply by seeing how many price points these bars will touch.

For example, as soon as a price bar touches a particular price level – let’s take this white bar, right here. This price bar is a weekly price bar. If we took this bar, and we said, “For this week, prices started out very high. They came down to this level, and they closed back up at this level.”

This seemed to be a turning point. This level right here, where I  have this little dot, seemed to be a turning point. It turned that around, to bring the market back up again. When it broke through it again, it was no longer a support point. It now has become resistance, now that it has broken through that.

Actually, what happened was, we consolidated for a while. It did come back up to that price level, which is the same price level here. It bounced back down twice off it – which now makes it an even more significant price level.

Let’s go to a daily chart for a second. Instead of doing “All,” let’s just do the last 9 months. This was the point that I was referring to here. Prices came down, and it reversed significantly off of this price level. They did eventually break through it, so it was no longer support. Over time, they did come up and test that price level again, here and here.

At these points, it sold off significantly. At this point, it sold off even more significantly. There is some resistance at this point. Here’s something that is very interesting. Remember how we talked about when resistance on the upside is broken through, usually there is exuberance to the upside?

Because we have a prior history here, the exuberance may not be as strong as it is if it breaks through this 14,000 level. If it breaks through this 14,200 level, you’re going to see significant price increases over the next few months. Generally, that is the time to get long in stocks.

Right now, we’re still in this consolidation period. Let’s go back for at least 1 year here, so we can see how far this consolidation period goes back. You can see that we broke through the 11,500. Since then, we have gone up to 14,200. In this level, we have fairly significant, wide-ranging prices, in which we’re just floating around here, not making any progress to the upside, and not making any further progress to the downside.

The way I measure the resistance points is the same as what I have just told you here. When I see a price level and a dramatic reversal from that price level, either to the up-side or the downside, I highlight it with a little oval. I go out to my drawing tools and just take out the oval tool. I make the ovals wherever I feel that it’s significant.

When I see these levels, and I’m thinking about putting on particular positions, especially for the monthly income trades, what I like to do is… Let’s say that the time I’m putting these on is right around the 3rd week of the month, right around where the expiration is.

For example, I’m right in here on the 22nd, which is the expiration for the January options. Is this a good place in which to put on trades in which I am hoping that the price will fluctuate back and forth, plus or minus, around this price level?

Well, knowing historically that when we have significant sell-offs in the market, like what we had in the month of January.

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