First Low Retest

The same setup also applies to bottoms. The volume of the second, third, and fourth lows are always compared to the volume on the first low. Figure 4.10 shows this setup, which is called the First Low Retest. The rules are the same as for the First High Retest, but on the downside.

FIGURE 4.10 First Low Retest Shows the Volume Comparisons to the First Low

FIGURE 4.10 First Low Retest Shows the Volume Comparisons to the First Low

As Figure 4.10 shows, volume declines that are greater than 3 percent but less than 8 percent result in a "No Man's Land" condition. Once volume compared with the first low declines by 8 percent or greater, a buy signal is triggered.

Before going further, we need to consider a nuance in interpreting volume. When there is a sudden expansion in volume, it is a longer-term bearish sign but a short-term bullish sign. A sudden expansion in volume usually stops the trend, at least momentarily. This expansion in volume uses up all the energy for the short term and stops the trend. Sometime after a big expansion in volume, the trend may follow through for another day. However, that day shows a lot less volume. This is a common occurrence in the market. The price low is achieved one day after the big expansion in volume. In cases such as these, use the highest volume (energy) day for volume comparisons and use the highest (or lowest if trend is down) price of the day or the next day for swing comparisons.

To illustrate this point, look at Figure 4.11' which shows a chart of the S&P 500 ($SPX) that focuses on May 2005. Here, we are comparing the maximum energy (the highest volume day) to an extreme price range. Sometimes they do not fall on the same day but are still very close to each other.

Let move on to Figure 4.12 to see how a First Low Retest sets up. Notice that we are taking the price low day of May 18, 2005, and volume day from May 15, 2005. Also notice that the $SPX traded below the price low of May 18, 2005, twice and then closed above the May 18, 2005, low, and both of those days had less volume than May 15, 2005. These conditions showed the $SPX did not have enough energy to get through the May 18, 2005, price low and therefore triggered a buy signal.

S&P 500 Lame Caii Index (SSPX'l_fc) 2007 DecisionPoint.com

S&P 500 Lame Caii Index (SSPX'l_fc) 2007 DecisionPoint.com

FIGURE 4.11 Chart of S&P 500 Shows Big Expansion Volume Day on May 15, Followed by a New Price Low in the Next Trading Session Source: Chart courtesy of DecisionPoint.com.

FIGURE 4.11 Chart of S&P 500 Shows Big Expansion Volume Day on May 15, Followed by a New Price Low in the Next Trading Session Source: Chart courtesy of DecisionPoint.com.

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