Way of the turtle

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Way of the Turtle
HO: Petroleum-Heating Oil #2-NYMEX (Floor Trading Only)
1.60
Nov 2000
Oct 2000
Sep 2000
Aug
20
00
Jul 2000
Jun 2000
1.70
1.80
1.90
2.00
2.10
2.20
2.30
2.40
Support 1
Support 2
Support 3
Resistance
Figure 6-2
Support Breaks Down
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fall quite a bit. As Figure 6-2 indicates, this is exactly what happened.
The price fell all the way to $1.85, where there was some weak buy-
ing, probably as a result of a previous support line at that level seven
months earlier. This line did not hold, and the price did not start to
come back up until late September after hitting a low of $1.73.
Smart countertrend traders would have been out near or on the
close on September 5 or perhaps the following morning. They
know that sometimes support holds and sometimes it doesn’t, and
you do not want to fight the market when it does not or you could
be wiped out. This could have been one of those instances.
Imagine that you had been bullish on heating oil and had
bought 5 contracts at $2.10 in anticipation of higher prices; you
might have bought 5 more contracts at $2.05 as the price became
even cheaper when measured against the anchor of the recent
$2.10 price support level. What would you have been thinking as
the price dropped below $2.00 or $1.90 and then broke $1.80 a few
days later? That small 5-contract trade that developed into a 10-
contract losing trade would now be a whopping $115,500 loss (10
contracts with a $0.275 per gallon loss per contract on average with
each contract being for 42,000 gallons).
This kind of thing happens all the time to new traders. They
panic and find themselves on the wrong side of the market when
it moves swiftly and suddenly against them. Trend followers love
these occurrences because they are selling on the way down, and
as the market makes new lows, they are making money.
The source of the edge for trend followers is the gap in human per-
ception at the time when support and resistance breaks down. At
those times, people hold on to previous beliefs for too long and the
market does not move quickly enough to reflect the new reality.
Falling Off the Edge
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81

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That is why there is a statistically significant tendency for the mar-
kets to move further when support and resistance breaks down than
at other times.
In the case above, there are no new buyers at the prices below
the initial resistance at the end of the “Support 1” line. If you
wanted to buy heating oil and the price was dropping below $2.05,
why would you buy there? You wouldn’t; you would wait until the
price had stopped dropping. Why buy now if the price is dropping?
Yet as the price continues to drop, even more people who need to
sell will panic, sending the price lower and lower. This will con-
tinue until the selling exhausts itself and some of those who wish
to buy start to believe that the price will not drop further.
The Turtles saw this happen time and time again. Sometimes
we were initiating positions, and during those times we were happy
with the subsequent price movements. Sometimes we were exiting
positions, and at those times we were among those trying to exit our
profitable positions as we saw the support break down.
A breakout occurs when the price “breaks out” of previous resist-
ance and support levels. As breakout traders, we were buying resist-
ance breakdowns to enter long trades and selling support
breakdowns to enter short trades. We sold short-term support break-
downs to exit long trades and bought short-term resistance break-
downs to exit short trades.