It’s Messy. . .So Deal With It!!!

If you’re a trader, dealing with probabilities is a
way of life for you. Nothing in the markets is a sure-thing (duh!), and you have to constantly be on guard against becoming too self-confident.

So when it comes to pattern setups, you may look all you want for the right
patterns coming together in confluence, but it’ll rarely look as neat in reality
as it does in the textbook example.

Yet, the real-life cases that are the most messy often produce better results
than the ones that are closest to the textbook idea.

Take a look at this chart of Gilead Sciences
(
GILD |
Quote |
Chart |
News |
PowerRating)
.

Looking at the chart, you might ask, “What is this mess all about?” As you can
see, the July 25, 2000 low didn’t line up with any recent well-defined support
or resistance levels. My idealized red support line is drawn four points above
the July 25, 2000 low. Yet, we went ahead anyway and posted an alert in TradersWire
yesterday which raised the possibility of major swing-low taking shape. Reasons?

  • Momentum. GILD broke out of a four-day range on an expansion of
    range and high volume. Traders were getting interested.
  • Round number. GILD’s show of support was coming in off the round-number price level 70. Look at the previous recent support levels coming in
    at 50 and 60.
  • 50-day moving average. Typically, we look for previous recent
    bounces from a moving average before we consider it a viable support or
    resistance factor. In this case, you don’t see that. But when a moving
    average comes in along with a confluence of other factors, we basically
    cheat and let it help us make a decision.

As I suggested in yesterday’s Chart of the Day, as traders mature, they
tend to be less concerned about drawing black-and-white conclusions, than they
are in striving to understand what’s going on.

Until tomorrow,

Eddie