Stock market commentary, analysis, insight and opinion of the RightLine Editors is available every Tuesday/Thursday evening & Saturday
afternoon. The following is excerpted from the:
October 19, 2017 - The RightLine Report
Notes From The Editor
Trading is a game of probabilities. Every experienced trader knows that when it comes to the market, there are very few things that can be depended on with absolute certainty. However, even though the market's tendencies and traits are not completely reliable in every situation, they do present a powerful framework that we can use to recognize opportunities with a high probability of success.
For example, the market's fondness for bouncing at significant support levels such as the 22, 50, 100, and 200 EXPMA -- Exponential Moving Average -- is well documented. The 50 period monthly and the 200 period weekly moving averages aren't as well known, yet they carry similar support and resistance significance.
Experience reveals the realities that trade set-ups don't always produce the desired results. However there are still two very important lessons to be learned from the story told by the charts -- even when a trade setup doesn't follow through as anticipated.
The first has to do with the relationship between trade Set-ups and Triggers. For example a bounce setup should be specific enough to leave no doubt that a rebound is likely to occur. "Likely" doesn't mean "definitely." That's why the Trigger is so important in any type of trade setup.
The Trigger should always confirm the price direction that is indicated by the Set-up. Price must clearly move in the intended direction before a position is entered -- usually beyond a resistance level such as the high or opening price of the Set-up day. Sometimes price action provides a Set-up based on reversal conditions that signal a potential bounce. However, there are times when the price action does NOT confirm that the bounce is genuine. Instead of continuing higher above the previous session high, prices stall, then drop back, perhaps below the low of the day. Whenever the Trigger does not confirm an entry into a bounce Set-up, the trade should not be entered.
Which brings us to the second lesson. Just as stocks that break out above previous resistance have a very good chance of going even higher, those that fall beneath support have an increased chance of heading even lower.
Bounce trades that fail to materialize will often produce excellent short setups. Once the low of a previous session gives way, the moving average providing support will also often cave in. Once that happens, prices will normally plunge even lower as a significant technical rule comes into play ... "What once was support becomes resistance."
Bottom Line: Regardless of the specifics for each trade Set-up and Trigger, the Trigger should always confirm the price direction that is indicated by the Set-up. When price doesn't reach the trigger, stay out of the trade and be on the lookout for a break-down of support. This is where you will find some of the best shorting opportunities.
Thomas Sutton, Editor
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