Page 376 - THE MARKET WHISPERER

372 PART 10 - Winning Trades

stock jumped to $10.14, pulled back, and executed a classic reversal [1]
followed by a move of over $10. At the reversal point [1], we bought. There
was reason to doubt, since we did not know if the stock would go higher
than its previous peak. When it did [2], we increased the quantity. The
stock shot up to a new peak, where we realized good profits for most of our
shares. We then noticed that the price was consolidating around the peak
point with almost no pullback. The volume at the consolidation area was
not too large: in other words, not many new buyers or “weak hands” were
entering, and the stock was slowly developing a classic breakout formation
above $10.45. We bought more at the breakout [3] and sold again close to
the next peak.

Which tools learned so far were applied to this trade?
1. We learned that we love stocks rising above the $10 mark, since that is

the point where funds show interest.
2. We learned that we need to buy above round numbers: therefore, above

$10.
3. We learned that we need to buy at reversal [1], which is our first entry

point.
4. We learned to buy at breakouts [2], where we add quantities.
5. We added a quantity at an additional breakout, since we learned that

a long consolidation at the peak with low volume is a good recipe for
continued highs [3].
6. We learned that when the stock breaks through the line of resistance,
this line becomes the line of support, and the stock may execute a
“reassessment” (known as “retest”) [4] of the breakout point [3] before
continuing to new highs.

How to Take Advantage of a Retest

We discussed the concept of a “retest” in the section explaining support
and resistance, but because of its importance, I will now expand on the
initial information.

Often, following a breakout of the line of resistance (and the reverse
is true for a breakdown below the line of support), the stock will retest
the line. It drops back down to the breakout point, is supported at the
line of resistance which has been broken out, and thus becomes the line
of support followed by continuing highs. In the PAR chart we saw the
breakout [3] and the retest [4].