There’s something about round numbers that attracts the human mind. If the price of an object is $19.95, people automatically round that up to $20. If a house is for sale with an asking price of $1,095,000, expect the first offers to begin at $1 million.

Call it laziness or call it efficiency. The fact remains, when considering numerical values people zero in on the nearest major round number.

This tendency is visible on most stock charts. Below is an unmarked chart of Macquarie Group Limited (MQG), with a red line drawn at each 5.00 increment beginning at the bottom with 35.00:

Note how often the price pauses or reverses at one of these round numbers. Note how none of them is ignored. That’s because stock traders, when entering or exiting the market, or placing a stop loss order for a trade, tend to gravitate towards round numbers, with orders such as “Buy at 40.00” or “Sell at 45.00.”

When examining the chart above, for example, it seems clear that a number of traders decided MQG would be a bargain at 35.00. They left orders with their brokers or online trading platforms to buy the stock if it fell to that level. When it did, all of those standing orders were triggered, and the resulting buying pressure drove the price back to 40.00 in one of those self-fulfilling prophecies for which technical analysis is famous.

But here’s the rub: the price never actually reached 35.00. On 6 July it touched 35.01, its 52-week low—and it never went lower, rebounding that trading day. And neither the brokers nor the trading platforms were likely to fudge on the entry price.

The traders themselves must have fudged when entering their buy orders.

The tendency toward round numbers is too well known in the shares market. Experienced traders, rather than entering an order at a round number, instead place it just above or below. In short, enough traders placed buy orders for MQG just above 35.00 so that the price never fell quite that far, and those who placed their entries at the round number never had their orders filled.

When last analysed, MQG had entered a trading range bounded by support at 35.00 and resistance at 45.00, with 40.00 in between serving as a midway break point, as shown on the chart, below:

trading.com.au/wp-content/uploads/2010/07/MQG_AX_28_07_10.png”>

As expected, the price action respected the round number of 35.00 and turned higher, filling in the gap left between 37.96 and 37.25. The rise back to 40.00 was a 50% retraction of the previous bearish trend, e.g., the fall from 45.00 to 35.00. The price is currently consolidating between 38.00 and 40.00.

A gap remains unfilled between 42.63 and 41.49. On the slow stochastic, the %K line has risen above the %D, indicating the buying pressure is holding. It seems likely the stock will rise higher to fill in the remaining gap and re-test resistance at 45.00.

technical analysis by Craig Liles

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