We use retracement levels to find out support/resistance for the stock/commodity. In this respect, two great masters viz. Leonardo Fibonacci and W.D Gann have given the following important levels:

Leonardo Fibonacci        W.D Gann
0.382, 0.50, 0.618           0.25, 0.33, 0.50, 0.66 and 0.75

While the above ratios do work at different times, it leads to confusion about choosing one over the other.  From the above ratios we can observe that 0.50 level is common to both the masters.  To explain the importance of this level, we can take the analogy of a see-saw, which most of us have enjoyed as a child.  Just as the seesaw tilts on the side which is heavier, in the same way market price will go in the direction which is heavier, that is, above 50% level (mid-point) buyers dominate, and below 50% sellers dominate.

In his various writings, W.D Gann emphasized the importance of 50% level with respect to the following:

1. All time high
2. All time high and low
3. Swing high and low
4. Calendar period high and low
5. 52 weeks high and low

Let us now understand the practical application of this idea based on the above rules laid down by W.D Gann.

All time high:

50% of the All Time High acts as a support.  When markets corrected in 2008, major support for many of the stocks was 50% of the all time high.  For example, all time high for NIFTY FUTURE is 6336 and mid-point of the same is 3168.  This level will act as support and resistance till such time a new high is made.

All time high and low:

In this case we have to consider 50% or mid-point of the range of all time high and low of the stock/index.

Swing high and low:

In this case we have to consider a swing on the chart.  50% of this level is always an important support/resistance.  The higher the time frame of the chart, the more significant will be the importance of the 50% level.

Calendar period high and low:

We need to consider calendar periods starting from the lowest level - i.e. day, week, month and the year.  For ready reference, one needs to prepare an excel worksheet every day and keep it handy while trading.   50% level for all these time frames will act as a good support and resistance level at least once.

52 week high and low:

52 weeks’ high/low will change as time progresses.   Currently, this figure for Nifty Future is 4939 i.e. mid-point of the High 5537 and Low 4341.  Thus market will show strength above the level of 4915, and show weakness below this level. In the coming weeks, when 52 week low increases to 4532 and assuming that 52 week high remains unchanged, we will have 50% level at 5035.  When this happens, we will have bulls dominating above 5035 and bears dominating below it.  Just as 200 DMA is considered important to identify the bullishness/bearishness for the stocks, similarly, items trading below the mid-point of 52 week high/low show weakness, while those trading above this level show strength.

Important for Day Trading:

This method is a very simple and effective tool for day trading, as it helps us to be on the right side of the market.  If you are able to get this level on the trading terminal itself - it can be done on the NSE’s NOW terminal, it eliminates the hassle of computing separately for each script.  Moreover, this being a dynamic figure, you won’t need to re-compute when a new High or Low is made.  For day trading purposes, you can assume that stock is strong above the day’s mid-point and weak when below it.  To further improve the odds for a successful trade, you can use it in sync with the Tick Average available on the terminal. 

I am sure the above analysis will help you to know when the balance of power shifts from the bulls to the bears and vice-versa, on different time frames.  You can first test this idea on Nifty/Bank Nifty future and if you find it profitable, you can also apply it to any index, stock or commodity. Moreover, it is helpful for those who do not refer to the charts for trading.  I have given below a format (based on EOD data on 20.8.2010) that is easy to compute and gives all the information referred in point 4 & 5 above.
 

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