2 Ways to Potentially Gauge a Dip in PriceTrading markets should be simple right? Establish the direction of a price trend, take a position in the direction of that trend and enjoy the ride!
Of course, in practice, we all know trading is never that easy. All traders go through similar anxieties regarding whether the current level is the correct one to trade.
Perhaps one of the hardest challenges if you want to buy an asset, is when a high in price has already been established and prices are selling off. Are you now wrong with your view to buy, or should this sudden weakness be used as an opportunity to take a long position at possibly a better level?
As traders, we face these decisions every day, but fortunately, technical analysis offers several tools to aid us. Today, we want to look at 2 approaches that can assist in gauging how far a correction in price may go, and if we should consider that dip in price as an opportunity to take a position or not.
Previous Highs as a Support:
We all know prices never move in straight lines, be it to the up or the downside. Corrections are often seen as a healthy counter move to the on-going trend. However, being able to anticipate the extent of such weakness and when to make that trade, can be vital.
If we look at the chart of the UK 100 Index above, we can see that between May 15th 2024, when the index traded to a high of 8477 and August 5th 2024, when the 7906 low was posted, a period of sideways price activity materialised.
An upside closing break from this range materialised on January 17th 2025, at which point, traders perhaps began to anticipate a more extended phase of price strength.
However, as we’ve said, prices don’t always move in straight lines, even after such a break higher. Often, a pullback in price develops, offering opportunities to enter the market at potentially a better level than if we’d blindly followed price strength after the initial break higher.
A pullback in price is perfectly normal and doesn’t alter possibilities of a more extended phase of price strength. However, the challenge is anticipating where support may be found again, to hold and resume the advance.
Often, old price highs can be useful, as having previously marked resistance to price strength, once broken they can become support on dips, and may hold future price weakness, even turn it higher once more.
Within the UK 100 index, we might consider 8418 from August 30th and 8477 from May 15th as old price highs, which might then become support, after the January 17th upside break in price.
To highlight this possible support area marked by these previous price highs, where buying opportunities might have been offered in the UK 100 index during the January price setback, we’ve drawn two horizontal lines on the chart below.
Following the January 17th 2025 upside break, having previously been a resistance focus, the 8418 and 8477 highs, might now became potential support to a dip in price, possibly able to hold and reverse the correction back to the upside.
This 8418/8477 range, proved to be support when tested on January 27th 2025, from which price strength developed again, to post new all-time highs.
Importantly, it is possible given that this 8418/8477 range proved to be support in January, it could do so again, so keep that in mind, if price weakness develops, at any point in the future.
Using The 10 Day Moving Average to Act as a Support to Price Dips:
In the example above, the UK 100 index correction in January lasted several days, and in certain cases, this could even last weeks. However, what if price is already within an established uptrend? It’s here that setbacks may be seen over a shorter period of time with shallower price declines.
In this type of set-up, it is often the rising 10 day moving average that marks the extent of a price dip, before turning price activity higher again.
As an example, let’s look at Gold during 2025 so far, focusing on each recent setback in price. During this latest advance, it has been the rising 10 day moving average that has provided support for price dips on each occasion. Subsequent strength then extended the uptrend to new all-time highs.
Within such an advance, as traders, we might focus on the rising 10 day moving average to highlight possible support to short term price dips within an uptrend, and an area we might wish to use to establish long positions, anticipating continuation of the on-going uptrend.
However, it is important to be aware, a break under the 10 day moving average support might reflect a change in price direction and see deeper declines. So the use of a stop loss to potentially protect any positions is important.
With all this in mind, last Friday (February 14th 2025) saw Gold weakness again back to the rising 10 day moving average support. It will be interesting to see if this holds the recent weakness to extend the current uptrend to new all-time highs, or if a closing break lower develops, suggesting risks could turn towards a more extended phase of price weakness.
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