Round Number Resistance? Some Data

9th Oct '20 by Chris Brown

6 comments 553 reads

This is what happens when you’re working from home and your attention begins to wander come Friday afternoon…

So my thought process when looking at my holding in Spirent Communications (LON:SPT) today, when it was trading around 298p, went something like this: 'I like it when stocks hover just below a round number, they often pop higher when they break through….......... well if that’s true, it should mean fewer stocks will sit just above a round number......... I could probably check that.’ Hence I decided to download all the pricing data from the FTSE All-Share index into Excel, and have a play around!

If share prices are relatively random (note: share prices, not company valuations), then we should expect to see roughly 10% of share prices land within each decile between the big round numbers, such as say 300p and 400p: i.e. 10% of stocks having a share price of 300p – 309.99p, 10% with a share price of 310p – 319.99p, and so on.

Over time share prices move around a lot, therefore if we do discover any patterns, this could probably be attributed to behavioural reasons, rooted in investor psychology.

The theory I’m testing is that once a share price breaks its round-number resistance (e.g. moving from 298p to 300p or 29p to 30p), selling pressure reduces / buying pressure increases, and it’s off to the races. Therefore it shouldn’t linger at say 300p – 310p for very long, but race higher.

What does the data tell us?

The exact opposite!

Lots of stocks are sitting just above their round-number resistance, at the equivalent of 300p – 309.99p. So I need to turn my theory on its head – stocks often sit just above their round-number support levels, and once they breach this support a further collapse may be likely – they’re possibly more inclined to move from say 300p to 250p in short order.

Of course, this is one snapshot in time on a random Friday in October. A proper time-series analysis would need to be conducted, to get meaningful results and uncover any true patterns. But it does suggest that something statistically significant may be going on, with 15% of stocks just above their whole number resistance, and only 7.5% sitting just below it with a 9 as their second digit. There are roughly double the number…

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William K

10th Oct '20

Interesting observations. Thanks Chris. It's all about psychology, as you suggest. Retail traders and institutions tend to set their stops and limits at round numbers so things tend to happen at these pricing points. Investopedia covers the basics of support and resistance, including the round number factor, in a recent article. The price of Spirent Communications (LON:SPT) (I hold) is in a Darvos box and might be about to break higher. My guess is that the new support will hover around the 290 mark for a couple of weeks until the market makes up its mind, at which point one would predict - in the absence of bad news - a swift move up to 350. Fingers crossed!

DWit199

11th Oct '20

The proportion of digits in the first, second, third etc position in a naturally occurring series of numbers is not equal, as you propose, but is defined by Benford's law.

For the first and second digit, the proportions expressed as percentages are as follows:

Digit	1st	2nd
0		11.968
1	30.103	11.389
2	17.609	10.882
3	12.494	10.433
4	9.691	10.031
5	7.918	9.668
6	6.695	9.337
7	5.799	9.035
8	5.115	8.757
9	4.576	8.5

Chris Brown

12th Oct '20

Ah, thanks for that DWit199. First time I've come across Benford's Law - it certainly must be the primary cause of the trend. The slope within the FTSE data does appear steeper, so perhaps there may still be something in the round number factor.

HumourMe

17th Oct '20

People generally process 0's, and 5's more easily. There is a hint of that in the your chart above. This would manifest in numbers with 00 and 50 as the 2nd/3rd digit. So I repeated the analysis for the next two digits after the leading digit, based on Fridays close (there is an R package benford.analysis that makes this easy ... after a couple of months learning R). There certainly seems evidence for xx5's and xx0's being 'attractors'. xx5 and xx0' are coloured green.

It looks non-random to me. But useful? Possibly for stops.

Bushranger

An interesting read. There could be he crossover in the psychology behind this regards people buying a stock just below the round number. The same reason stores set their price points at eg. £2.98 not £3.00. Practically it would be easier dealing with whole numbers, the difference to the consumer is negligible, but it is the psychology behind it that sets the price at £2.98.

Phuntt

I also think Spirent Communications (LON:SPT) is such an interesting example that prompted the research. I’ve owned on 2 occasions this year from £2.70 or below and sold at or just over £3 even though my target is about £3.75. For me, I just have no confidence in the market rewarding the company so when it reaches the big number, I just sell and bank fairly confident I’ll be able to pick it up again 10% lower or let it go...

Round Number Resistance? Some Data

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Chris Brown

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