F.A.Q
The levels of support and resistance evolve over time, current points result from past confrontations between buy and sell orders. Generally, when a contract reaches a support or resistance level, it increases trading volume and temporarily halts or slows the rate of price changes.
A simple lack of counterparty on an order can cause a historical support or resistance level to be exceeded and shifted. Thus, it is more accurate to speak of a "zone" of tension rather than a precise point.
The exercise price of derivative products such as options, which is fixed, also contributes to the creation of these tension zones. These prices provide levels that trigger a volume of interest, incorporating price movements into the mechanism described earlier.
When examining open positions (open interest) at different strike prices, it is tempting to view them as a directional indicator. However, for indices, this approach is not relevant. Apart from identifying specific areas of interest, analyzing open interest does not reveal the likely direction of the market.
The only possible exception is when the residual part of an OTC hedge is replicated in the listed market, but this represents only a fraction of the actual activity.
Adding to this is the complexity of arbitrage strategies on listed derivatives, whether futures or options. Market participants often combine several instruments to hedge their positions, exploit price differences, or adjust their risk exposure. These setups, sometimes involving simultaneous buying and selling across different markets or maturities, artificially inflate the volume of open positions without necessarily reflecting a true directional conviction.
Consequently, whether from futures or options, open interest data reflect neutral strategies as much as bullish or bearish bets. Their isolated interpretation therefore does not allow for determining the real market trend.
Imagine a combat video game with two characters, each having a power gauge. Our indicator operates on the same principle. We monitor the confrontation between two characters— a seller and a buyer, each equipped with a power gauge. The goal is to detect, within a price movement, whether an index or other asset is rising because the seller is weakening or is it the rise of buyer power that is driving the movement. The reverse applies for a downward movement.
The green histogram represents the buyer's strength, while the red one represents the seller's. If both progress in the upper zone above 0, the price evolution will occur at a moderate speed in the direction of the stronger party. Once one of them starts to lag and enters the negative zone, the speed of the price movement will accelerate.
For the one lagging, two levels can halt its descent. Below the second level, we consider it a "market anomaly."
This indicator is a synthesis of the first one. Now you are thinking, "Why bother with the first indicator, you might as well look directly at the synthesis." Teu teu mistake ! You won't get the same information out of it.
The synthesis is composed of 3 curves :
One yellow and one green curve giving an indication of the short movement.
A red curve with a level below or above 0 gives an indication of the background movement.
Sales pressure began to pick up again around the first level, confirmed by a discrepancy in its synthesis.
- Deduction : The probability that the price will break the resistance upwards is extremely low.
Buying pressure begins to pick up again on the 2nd stage, confirmed by a stagnation of its synthesis.
- Deduction : Strong probability of the price returning above the resistance.
Buying pressure and synthesis are in the "market anomaly" zone. The entry in this zone is the result of an over-reaction of the analyzed support.
- Deduction : Exit from this zone is generally accompanied by high volatility.
The indicator at the top (white) is a basic index (oscillator) measuring historical volatility (HV). Putting online complex statistical indicators, requiring more attention and learning, did not seem appropriate to us. Visually, an oscillator will allow you to grasp the overall level more quickly and easily.
The indicator at the bottom (yellow) measures the sensitivity of the first indicator.
The bottom indicator (yellow) measures the sensitivity of the first indicator.
If all these explanations bore you, and you want a simple answer to the question: will it go up or down ? In this case only one solution.