I’ve had a couple of questions recently on the meaning of price ’structure’ so I thought I’d take this opportunity to explain it and show an example of how analyzing price structure can give you a guideline in your trading.
Let’s think of ’structure’ as components that hold up price, or the arrangement of price itself that builds upon a basic level to greater complexity.
The easiest way to look at price ’structure’ is to compare subsequent swing highs and swing lows to determine if price is building upwards or tearing downwards. All it takes is drawing dash-marks on a chart.
Let’s use this example of the S&P 500 Index from 2006 to mid-2008 (prior to the ‘crash’) to see if we can ascertain the price structure.
The Blue lines represent higher highs and higher lows compared to the previous high or low while red marks represent lower highs or lower lows as compared to the prior swing.
Also, these lines themselves mark potential support or resistance zones, but more importantly, you are seeing how the ‘picture’ is evolving as new information inters the market (or new bars are being drawn on the chart). The current bar is influenced by so many forces, one of which is the current ‘structure‘ of the market or price trend.
Higher highs and higher lows – as was the period on this chart from 2006 until November 2007 – is the most bullish ’structure’ possible. The first lower low in November was a warning sign that the foundation of the uptrend might be cracking. As price formed a lower high in December 2008 then swung down, that was a further sign the structure was weakening considerably. As price *took out* (broke beneath) the lower low formed in November, the “structure” collapsed and the trend was officially reversed (red arrow pointing up).
Contrapositively, lower lows and lower highs – the series from November 2007 to present – is the most bearish ’structure’ possible. We would need a higher high and higher low to change the structure – or trend – from down to up. “Foundation Building” must take place and this evolving ’structure’ is part of that in terms of price/trend reversals – but you can’t ascertain that easily if you don’t look at the underlying structure itself.
The second way to analyze price structure is to look at key moving averages – their structure – and how price behaves towards them.
I frequently refer to “The Most Bullish Orientation Possible,” by which I mean that the 20 period EMA (exponential moving average) is higher than the 50 period EMA which itself is higher than the 200 period SMA (simple moving average). These numbers are not absolute – you can use your own MA calculations to analyze structure as well, but these are the ones I have chosen and work within my style of market analytics.
This bullish orientation persisted all the way to January 2008, when the 20 week EMA broke beneath (bearish cross) the rising 50 week EMA as both averages turned negative. This chart ends with the 20 week EMA crossing (bearishly) beneath the 200 week SMA (downward sloping red arrow).
Of course, the “Most Bearish Orientation Possible” is where the 20 EMA is beneath the 50 EMA which is beneath the 200 SMA – an orientation we are experiencing currently on the weekly chart and have been for quite some time on the daily chart of the S&P 500.
When price crosses above or below a key moving average, that says something about the underlying price structure – how the average ‘contain’ or support price. I sometimes tend to think of moving averages as floors or ceilings, particularly in strong trends. When price has broken beneath a key average after supporting above it repeatedly, the “structure” has changed bearishly.
The same goes for moving average crossovers themselves – their orientation or ’structure’ give us clues about the price trend itself as it builds or is torn down.
Of course, there are other ways to measure price structure, such as Elliott Wave, Market Profile charts, etc but I still feel the easiest and perhaps most reliable method is to view the price itself in conjunction with the orientation (or structure) of key moving averages.
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