Praise for Trading from Your Gut

107
Resistance
Support
Test or Breakout
Rebound
FIGURE 6.1
The ideal rebound swing trade
This model illustrates a rebound swing buy trade made in an up
market. The basic idea is to buy at the beginning of a rebound off a
support level when the distance from the support to the resistance is
significantly greater than the entry risk. 
The important components of the method are the following: 
1. The market should show a clear level of support and resist-
ance, defined by at least one visual anchor point on the chart
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for both the support and resistance. Each anchor point
should be a point that is visually separated from the trading
days before and after it. 
2. There should be a significant price difference between these
support and resistance levels. 
3. The market should return to test the support level. This can
be either a breakout through the support on the downside or
a test of the support that comes close to the support levels. 
4. The market should demonstrate a clear bounce off the sup-
port levels.
5. The trade should be taken anticipating the cycle turning
from a series of down days to a series of up days. 
6. The trade should be taken respecting the overall market
cycle.
Let’s consider how this ideal model fits into the real world.
Recall the Cisco (CSCO) chart we used to illustrate support and
resistance in Chapter 4. In Figure 6.2, notice how a trader can use
the support line to anticipate a move toward the upside after the
rebound off the support level at $17.80.
Notice that, after leaving the price labeled Support, the stock
price climbs to about $19.40, or more than half the distance from
the support to the line labeled Resistance, at $20. This is not as high
as I would prefer in the ideal case. Ideally, the price would rise again
to near the resistance level, at $20. This trade is not a textbook
example; few real-world examples are. Nevertheless, the rise to
$19.40 is significant and sufficient for our case because it provides
vertical and horizontal separation for the low labeled Support,
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which makes it a visual anchor point and one that is more likely to
serve as a support level.
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