Watch For The Probe Effect
There are some subtleties you have to be alert for when
using multiple signals to identify trading opportunities. It isn’t always as clear-cut as you might think, and traps are sometimes set for unwary trader.
Here’s a case in point.
Brocade
(
BRCD |
Quote |
Chart |
News |
PowerRating) is pulling back to its 50-day moving average
and its 50% retracement off of the Oct. 23, 2000, high and the Oct. 26, 2000, low. The
widespread tanking of techs as a result of the post-Tuesday-election hangover is weighing
heavily on BRCD. A trader on the setup alert might be looking for some support to come
in here to produce a tradable bounce.
That may happen, but I’m uncomfortable with the risk because
BRCD recently broke well below this level and touched 190 before rebounding.
Probes like this can serve two opposing purposes, depending on how other
technical factors may influence you. From a bullish perspective, you might say that
the strength of the slingshot up from the 190 level demonstrates that there are
plenty of buyers who see BRCD as a bargain in that price range.
However, the view I’m favoring is of a more bearish perspective. When a stock is breaking a major support level and then bounces
back above it, technicians will often call that a probe. It’s testing the waters,
and your job is to watch the stock’s behavior to assess what will happen next. I tend
to look at probes as “breaking new ground.” Once a hole is punched
through a support (or resistance) level, it becomes easier for the stock to make
a sustainable break of that level. In the case of BRCD, longer-term holders of
the stock got spooked when it dipped to 190. They were relieved when it came
back above 240. But imagine the fear that set in today when it pulled back to
where it is now. They will be wondering if a repeat performance is in store, and
they will be more inclined to sell if the current support level is broken. This
will usher in the possibility of a more sustained breakdown.
Till Thursday,