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More about Spider Webs

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Let's face it. To the uninitiated, charts with nested Keltner channels look as if a spider has spun a web over them. They're worth a little work to understand them, however. With a few tips and observations of your own, Keltner channels provide information that little else does.

What kind of information? Keltner setups allow traders to make judgments of whether support or resistance looks stronger. They enable traders to set potential upside and downside targets.

In my opinion, that's as true of a chart of the A/D line as it is of any equity or equity index chart. Because the A/D line provides an independent under-the-hood look at what's happening with prices, it's important to discover where it might go next and when it might reverse.

Previous articles have shown the formatting for the three nested Keltner channels. I've suggested that 15-minute or 30-minute charts are the most helpful when studying the A/D line using Keltner channels. For those who have the ability to chart 7-minute charts, these sometimes prove as helpful as they do on price charts. Those previous articles in the series can be found here and here.

The A/D line often finds support or resistance at Keltner lines at the close of a given period, whether or not it pierced that line during the period. As noted in previous articles, certain channel lines often prove more important than others in providing support or resistance.

Why watch them all, then, if certain ones are more important than others? The reason has to do with determining when support or resistance looks particularly firm.

Annotated 15-Minute Chart of the A/D Line:

By watching the A/D line, particularly with nested Keltner channels, traders would have been able to ascertain on 3/14 and 3/15 that support was holding on the A/D line. Bears would have been forewarned before the rally that began the afternoon of 3/15 to protect their bearish profits.

To judge whether support or resistance seems firmer, know which lines are most important, but also watch for those periods when any lines converge. Are more converging at support or resistance?

Annotated 15-Minute Chart of the A/D Line:

It looked likely that the SPX would pull back because it looked likely that the A/D line would due to the configuration of resistance versus support on the A/D chart.

Annotated 15-Minute Chart of the A/D Line:

Bright and early the next morning, the morning of 3/14, the A/D line dropped like a stone within the first 30 minutes of trading. The SPX was to go down with it, sliding into the March low.

Those spider webs are already beginning to make some sense, aren't they? They'll make even more sense next week and the week after when we look at setting targets for the A/D line and pinpointing Keltner-style divergences.

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