TECH TALK ed.

1
Dynamic Support and Resistance lines on the 7,500 Volume chart of the ES

When you first download the Kwik*POP indicators on your computer you quickly discover that there are a
whole lot of indicators. At one point in time we had 160 indicators. Yikes, that was definitely overkill and
it created a lot of confusion. As a user you naturally want to use the most effective indicators and eliminate
the rest. That is the purpose of this document, to set up a chart with the core (essential) indicators and then
we’ll add in additional tools to create a mosaic effect focused on various shades of momentum.

We are going to create a basic Kwik*POP chart that will look like the one below. That chart really has
everything you need to trade.

On your charting platform create a new 7,500 volume chart of the ES futures contract. Make it a
candlestick chart. NinjaTrader users will use our template called KPDT2 7500. TradeStation users can
simply use the WorkSpace called KPDT2 and you’ll see the 7500 volume chart. ESignal users will create a
7500 volume chart and apply the KPDT2 7500 template to that chart.

Here is what a NinjaTrader chart looks like with the KPDT2 7500 template.

Each platform will look similar, but due to different data sources and different charting construction
parameters there will be some minor variations. The differences between each charting platform are
minimal and do not effect the efficacy of trade set ups. In other words all platforms will flash the same
signal at the same time.

1
Throughout these presentations I will be using TradeStation and NinjaTrader charts for demonstration
purposes. I prefer TradeStation and NinjaTrader charts for my personal use, but that does not imply that
other charting platforms are any less effective or reliable. It’s just easier for me to demonstrate concepts on
the charting applications that I use every day.

We’ll use a TradeStation chart to examine the indicators on the chart.

1) Scorecard Colors; This colors the candlesticks. Blue is bullish and Red is bearish.
2) KP Pivot; This places markers at key inflection points on a cycle change.
3) KP E Bands; Yellow midpoint is the’Mean’. Settings 30L/20S of close.
4) New Up/Down Dots; show short term momentum shifts.
5) Dynamic Support/Resistance Bands; Show key support and resistance levels.

TREND >> BASIC CONCEPT >> RULE 1,2,3 and 4.

Let’s go back to Charting 101. An uptrend is a series of HIGHER HIGHS and HIGHER LOWS. A
Downtrend is a series of LOWER LOWS and LOWER HIGHS. Every charting book you’ve read and
every seminar you’ve attended references an Up Trend or a Downtrend the same way. Unfortunately,
everybody uses a different price interval or a different reference point to define these trends and that’s
where things get a bit confusing.

In this chapter we’ll use a tool that definitively describes an up trend or downtrend on a 7,500 volume chart
of the ES. For Day Trading the ES, we use the 7,500 volume chart as our core chart for referencing
TREND and Breakouts.

2
 The challenge has always been to objectively identify the lower lows or higher highs. My question, way
back when was always ..”A higher high against which reference point?” Are we talking about one
candlestick being higher than the previous candlestick? Are we talking about the first hours high or the high
of the last 15 candlesticks? What is the reference point that tells me without a doubt we are now making a
higher high or a lower low?

The KP DYNAMIC SUPPORT AND RESISTANCE BANDS provide that key reference point. They are
not subjective, they are based upon real time price action and adjust automatically throughout the day. They
are not based on Fibonacci calculations, although many times they match key reference levels. They are
derived from price and price momentum calculations. They are ‘Dynamic’ because they adjust (respond) to
new price inputs all day long. Most importantly .. THEY ARE EASY TO READ.

The lower purple line on that 7,500 chart is our SUPPORT LINE. The upper purple line is our
RESISTANCE LINE. On that chart you can see where prices cleanly CLOSED below the SUPPORT
LINE. Now let’s apply a little common sense to this. An UP TREND is Higher Highs and Higher LOWS
… right? If prices break below SUPPORT they are making a LOWER LOW are they not? If we are making
lower LOWS we can not be in an UP TREND any longer … right? The market can only trend two ways ..
UP or DOWN. And if we are not in an UP TREND, and we are making Lower LOWS, then we are in a
DOWNTREND … right?

So here is the simple rule that goes along with that logic or common sense.

RULE #1) WHENEVER PRICES CLOSE BELOW THE SUPPORT LINE ON OUR 7,500
VOLUME CHART WE ARE MAKING LOWER LOWS AND WE ARE IN A DOWNTREND.

3
Why is that rule important to understand? Because there are two components to a DOWNTREND. Lower
LOWS and Lower HIGHS. 80% of the time when prices make the FIRST NEW LOW after an UP Trend a
lower high will set up on the rebound.

FIRST LOWER LOW BEGETS THE FIRST LOWER HIGH … 80% of the time. Notice I said 80% of
the time. Every once in awhile the market will do some strange things … especially if some government
big wig or Fed governor is talking. That always screws up the works temporarily.

RULE #2) WE ALWAYS SHORT SELL LOWER HIGHS. Please learn RULE #1 and RULE #2. A
downtrend ( lower lows and lower highs) creates a STAIR STEP PATTERN DOWN. Each rebound back
up off a new low gives us an opportunity to get short from a higher level. When short selling the market we
want to sell as high as possible and every bounce back up off a new low gives us that opportunity. Study
that chart above and focus on the LOWER HIGH that set up after the new DOWNTREND started. We’ll
talk about timing our entries later on, for now just burn Rule #1 and Rule #2 into your brain.

On our 7,500 volume chart when is a DOWNTREND over? As soon as prices close above our
RESISTANCE LINE. If prices close above our RESISTANCE LINE then we are making HIGHER
HIGHS. A downtrend ( Lower Lows and Lower Highs) ends as soon as we make a HIGHER HIGH. If
we’re not in a downtrend any longer then … we must be in an UP TREND .. Right?

RULE #3) WHENEVER PRICES CLOSE ABOVE THE RESISTANCE LINE ON OUR 7,500
VOLUME CHART WE ARE MAKING HIGHER HIGHS AND WE ARE IN AN UP TREND.

Why is that rule important to understand? Because there are two components to a UP TREND. Higher
HIGHS and Higher LOWS. 80% of the time when prices make the FIRST NEW HIGH after a Downtrend a
Higher Low will set up on the rebound. Study that chart above.

4
FIRST HIGHER HIGH BEGETS THE FIRST HIGHER LOW … 80% of the time. Notice I said 80% of
the time. Every once in awhile the market will do some strange things.

RULE #4) WE ALWAYS BUY HIGHER LOWS. Please learn RULE #3 and RULE #4. An UP TREND
( higher highs and higher lows) creates a STAIR STEP PATTERN UP. Each roll back down off a new high
gives us an opportunity to BUY from a lower level. When buying the market we want to buy as low as
possible and every roll back down off a new high gives us that opportunity. Study that chart above and
focus on the Higher Low that set up after the new UP TREND started. We’ll talk about timing our entries
later on, for now just burn Rule #3 and Rule #4 into your brain.

The white line in between our Dynamic Support and Resistance lines is called the MEANSWINGLINE. It
is half the distance between Resistance and Support. Think of it as a 50% retracement line.

We’ll discuss uses for that when we explore breakout patterns, reversals and failure points. When you study
the Dynamic Support and Resistance lines on the 7500 volume chart always focus on where they went
horizontal in the past. Those levels represent support or resistance points on any trend reversals.

The meanswingline is a level of ‘soft’ support or resistance, but we watch for price reactions in that area.
The largest interval chart we use intraday is a 5 minute chart. The 7500 volume chart is smaller than a 5
minute chart and the 3350 volume chart is smaller than the 7500 chart. In these tech talk discussions we’ll
discuss how to use multiple interval charts for trading and trade management.

5
Study the price action around the meanswingline (white line) on this 5 minute chart of the ES.

THREE MEASURES OF AN INFLECTION POINT (price pivot)

1) STRONG/STRATEGIC >>> Dynamic Support and Resistance Lines. Those lines show a
structural change in the price trend if and when they are breached
2) MODERATE >>> Pivot markers identify significant price momentum reversals.
3) WEAK >>> New UP/DOWN Dots. These identify minor momentum reversals.

As mentioned earlier, the Dynamic Support and Resistance lines represent significant price barriers or
thresholds. A Downtrend remains in force until prices close above the RESISTANCE LINE. An UP
TREND remains in force until prices close below the SUPPORT LINE. Study the 5 minute chart above.
The downtrend remained in force until prices closed above the RESISTANCE LINE. IN A DOWNTREND
WE SELL INTO ANY BOUNCE BACK UP OFF A NEW LOW.

Once prices close above the resistance line our strategy changes because we are now in an UP TREND. IN
AN UP TREND WE BUY THE DIPS. So, we sell rallies in a downtrend and buy dips in an up trend. We
use the Dynamic Support and Resistance lines to define the trend and that determines our trading strategy.
Study the chart below for a moment. It is a 7500 chart of the ES for Monday 4/07/09

6
Notice the Stair Step Down pattern on Dynamic Support and Resistance during the DownTrend. Notice the
Stair Step UP pattern on the rally. The Dynamic Support and Resistance lines on our 7,500 volume chart
make trend definition quite easy and totally objective.

In our next chapter we’ll discuss PIVOT markers, the New UP/DOWN dots and KP E-BANDS.

For now, get familiar with our definition of trend based on using the Dynamic Support and Resistance
bands on a 7500 volume chart of the ES. That will keep you on the right side of the bigger moves.
Regards
WDH