Praise for Trading from Your Gut

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CSCO (Cisco Systems, Inc.) Nasdaq GS
9-Jul-2009
Op 18.27 Hi 18.51 Lo 18.06
Cl 18.17 Vol 52.9M
Chg +0.04 (+0.22%) 
CSCO (Daily) 
Resistance
Support
Breakout
Rebound
20.0
19.5
19.0
18.5
18.0
17.5
17.0
16.5
16.0
15.5
15.0
14.5
14.0
Mar
9
16
23
Apr 6
13
20
27 May
11
18
6
26 Jun
Jul
8
15
22
FIGURE 6.2
A swing rebound
This illustrates the requirement of a rally after the support
point. The support point needs to be something that other traders
will see. It must serve the psychological purpose of a price point that
will bring buying pressure as the price approaches that price level
again. A low followed by a significant rally when viewed visually on
the chart will do that. Traders will expect a potential rally off of sup-
port if the price level that defines that support is visually significant
on the daily chart. The point must stand out visually. This is the rea-
son for a level of vertical (price) and horizontal (time) separation.
Therefore, the rally to $19.40 is the beginning of the setup for
the rebound swing method because the bounce upward at $17.80 to
about $19.30 creates a pivot point on the chart that will be support if
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the price drops again. The rally lasts a few days and is followed by a
decline of two days.
The second time that the price drops back to the point labeled
Breakout on the chart, we have the second condition of the
rebound: a breakout or an approach very close to the support level.
In this case, the price breaks through the support, so we have a
breakout instead of just a test of the support. All else being equal, a
breakout is better than a bounce that does not go lower than the
support level: Any traders who had placed stops just below the sup-
port level are now out of the market because those stops were hit. A
rise in price after the stops have been hit is slightly stronger than a
rise in price without those stops having been hit.
Then at the point labeled Rebound, we have the trigger for the
trade: a price that breaks the previous day’s high. This price is signif-
icantly above the support level when measuring the distance
between the support and resistance. When you have the breakout,
you know the high price, so you can place an order to buy just above
this high. If the order is filled, you know you will have a trade that
meets the criteria of the rebound swing method. 
In this particular case, I consider the break above the previous
day’s high to be a significant rise above the support level. One way to
measure this quickly is to eyeball it. Those of you who prefer a more
concrete guideline could pick a certain percentage to start. Over
time, you, too, will be able to eyeball these price levels. For exam-
ple, because the support was at $17.80 and the resistance was $20,
the difference is $2.20. So a price above $17.80 plus 22¢, or $18.02,
is 10% over the support. According to my eyeball of “significant
price rebound,” or the concrete definition of 10% higher, when the
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price on May 26 breaks the previous day’s high, this triggers an entry
for the rebound swing method trade.
Note how this trade also respects the cyclical nature of CSCO
stock trading. The support level was originally set at the bottom of a
down cycle. This was followed by a couple of up days that reached a
high of about $19.30. Then the market cycle reversed and started
trading down for three days in a row. The trade made on the 26th
represents the first day of a potential up cycle. This increases the
likelihood that the trade will be successful. 
In Figure 6.3, I inset a portion of the chart for the S&P 500
stock market index below the prices for CSCO. You can see how the
overall market cycles coincide very nicely with the CSCO market
cycles. Most stocks are very highly correlated with the performance
of the overall market. Therefore, you need to make sure that the
overall market cycle is aligned with the cycle of the particular stock
you want to trade before you enter a new position.
Note how a support level in the S&P prices gives the S&P a plat-
form for a bounce, too. This means that this swing trade will be
more likely to work, the overall market cycle has been going down
and just turned up, the individual Cisco stock cycle has been going
down for a few days and has just turned up, and the up cycle coin-
cides with a bounce off of support for both the overall market and
the individual stock. The confluence of these four events represents
the perfect circumstances for a rebound swing method trade.
Although it’s an excellent setup for the rebound swing method,
this trade would not have been easy on the trader’s psyche. After the
entry at $18.15 or so on the 26th, the price went up substantially but
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then bounced around for the next three days between $18.10 and
$18.70 before finally blasting up to $19.70 on June 1. The three days
before it shot up would have been difficult for many traders; watch-
ing significant profits erode, then come back, and then erode again
can be emotionally trying. 
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Resistance
Support
Breakout Rebound
p
Breakout Reboun
S&P 500