SPY third test of 126.2 support held again which shows the astounding bid in the market right now. As our readers know we LOVE buying support but as a rule we buy the first test of support and never the second (if short time has lapsed between the tests) and certainly never the third. Nevertheless, it worked like a charm today and dip buyers were again victorious laughing all the way to the bank. No regrets though on missing this one especially since we didn't have any support alerts trigger at the same time.
We had a good question today from a reader who asked us "doesn't support become more valid the more times it tests the number?". The answer is yes and no. If for example stock HCPG has tested 50 support three times in four years then yes this is a very important support that has to be respected. But if a stock keeps banging on support within very short time intervals (and 3 tests in 5 days certainly qualifies as short time interval) then no, the risk-reward of buying support for us becomes too low.
Usually what one sees when stock keeps repeatedely bouncing on support is that the bounce becomes weaker and weaker until it finally bases on support and falls through. However that being said that pattern is a lot easier to trade on stocks than on ETFs (we rarely short breakdowns on ETFs, almost always our shorts on ETFs are resistance shorts, and not breakdown through support shorts).
It's a mixed picture out there and we don't have that many breakout longs nor breakdown shorts. As always, do remember that all talk is just that, talk, and all we do in the end is trade the set-ups.
