Strength of a Signal on a Retest

The next point I want to cover is the power of a retest to determine the strength of a signal. In Figure 4.13 , the issue trades above the previous high on 5 percent less volume and closes below the previous high. There is no assurance that this issue will turn down because the retest still had relatively good energy compared to its previous high, because volume declined by only 5 percent.

In Figure 4.14 , however, this issue trades above its previous high on 20 percent less volume, and then turned down and closed below the previous high. The result is a strong sell signal. Since the issue had far less energy on the retest compared to its previous high, it is a much better candidate for a sell signal. A trader can identify the strength of a sell signal by the degree of volume shrinkage on the retest of its previous high.

On previous examples of test of highs (or lows), we used a minimum of 8 percent shrinkage against previous swing highs (or lows) to qualify a

FIGURE 4.12 Chart of S&P 500 Shows Volume Comparison for May 15 and Price Low of May 18 as Basis for Buy Signal Setup Source: Chart courtesy of DecisionPoint.com.

5% shrinkage in volume on reteit

5% shrinkage in volume on reteit

FIGURE 4.13 Comparison of Volume on a Retest Shows Good Energy Remains when Volume Declines by Only 5 Percent successful outcome. The signal strength increases as the volume percentage decreases on the test of the previous swing high (or low). Therefore, if a trader has a choice between two issues, the stronger trade would be the one that has volume of 80 percent (meaning a 20 percent decline) on the retest compared to the first swing high (or low), rather than the issue that has volume of 95 percent (a 5 percent decline) on the retest

50% shrinkage in volume on rtiest.

50% shrinkage in volume on rtiest.

FIGURE 4.14 Comparisons of Volume on a Retest Shows the More Volume Declines, the Stronger the Signal Generated

FIGURE 4.15 Volume Comparisons of Retest Low in Questar Corporation (STR), First at Near- Equal Volume and Later with a Greater Volume Reduction to Trigger a Buy Signal

Source: Chart courtesy of DecisionPoint.com.

FIGURE 4.15 Volume Comparisons of Retest Low in Questar Corporation (STR), First at Near- Equal Volume and Later with a Greater Volume Reduction to Trigger a Buy Signal

Source: Chart courtesy of DecisionPoint.com.

compared to the first swing. Once again, we are using volume relationships to determine signal strength.

Let's take a look at Questar Corporation (STR) to show how these volume forces work in real life. As shown in Figure 4.15, in mid-February

2006, STR made a low near the $71 range. A retest of that level came at the end of February on a minor degree reduction in volume. The stock did rally for a couple of days then fell through the low at $71.

In early March STR made a low below $68 on expanded volume. A retest came three days later on about 75 percent less volume and produced a much stronger buy signal. As you can see in Figure 4.15 , the March low was not touched again and STR continued a strong rally into April and May. Because of the much stronger volume relationships, the March low was the stronger buy signal and produced a much stronger rally compared to the February setup.

Was this article helpful?

0 0

Post a comment