Use Money Flow to Verify Support & Resistance

Don't get pump faked at price support or resistance levels.

I’m a big advocate of support and resistance. Price tends to bounce off of support levels, and peaks at resistance levels. But sometimes price breaks down at support, or breaks out of resistance. How do you know when that will happen? Follow the money.

Right now, the S&P is at a pivotal level: the 4,100-4,200 range. If you do a quick search on my newsletter for 4,100, you’ll find a handful of articles about how this level has been crucial support, and now it’s crucial resistance.

Remember, prior support = future resistance.

So where do stocks go from here? Well, since price is at resistance, we should expect a sell off.

But if you follow the money — the institutional money — using the Chaikin Money Flow Indicator, you’ll second guess a sell off; or at least the strength of it:

We’re also seeing bullish signals on the longer term charts — a very bullish candlestick pattern called the Piercing Pattern has emerged on the monthly chart.

This is where price opens lower (even if slightly lower) of the prior period, and “pierces” well into the price action of that period.

Here, price closed at 3,785 for the month of June. July opened at 3,781, and “pierced” well into the price action of June.

A Piercing Pattern is a trading signal that manifests itself — when traders see it, they act on it. It’s very bullish.

Given the insane money flows into stocks, combined with monthly “buy” signal of the piercing pattern, the bias remains to the upside for bulls.

If you’re not long, you’re probably wrong.