Page 377 - THE MARKET WHISPERER

THE MARKET WHISPERER 37 3

Retest is a common phenomenon, and therefore in most instances it
can be anticipated that the stock will find support and continue to trend
up. In order to understand the retest, we need to analyze the predictable
behavior of buyers and sellers. Let us analyze the example presented by
PAR:

• The disappointed trader who missed a good chance
Traders who missed the breakout [3] watch the trending up stock with

disappointed eyes and regret to the depths of their souls that they did not
buy it when it was still a good opportunity. Following breakout, they are no
longer interested in buying at a high price and therefore wait for another
opportunity to buy when it pulls back. When PAR executes a retest [4],
they take advantage of the chance to buy, thereby helping to push the price
back into highs.

• The disappointed buyer
These are the people buying PAR at the breakout [3], but even when

they profit, they aren’t happy. They feel stupid because they did correctly
identify the breakout, but they didn’t buy an even larger quantity of shares.
Of course it’s easy to be smart in retrospect, but when PAR drops back to
the breakout price [4], they are happy to take advantage of the pullback
and increase their position. They, too, are helping the stock price go up
again.

• The short trader
Traders with shorts in PAR prior to the breakout hoped it would drop,

but were disappointed when the price broke through the line of resistance
[3]. Now they are losing, but are not interested in exiting with large losses.
They therefore wait hopefully for PAR to drop. When to their great joy it
does, they take advantage of the retest point [4] in order to close their
shorts “before the catastrophe.” In other words, they too are buying and
helping the stock price rise.

The conclusion is simple: all the players in the market share the same
goal of buying at the retest point [4]. No one is interested in selling there,
so that in most cases, a stock which has broken out and pulled back to the
breakout price will receive the support of buyers and return to highs.

The retest point can be used to our advantage in two ways: by placing
a stop order below the retest area in case the stock should suddenly not