Wednesday, October 06, 2010

Buy the first test of support, never the second

Our veteran subscribers have read this line literally a hundred times in the last four years, "Buy the first test of support, pass or short the second test".     We love buying support if it's the first time it's been tested in a long time (for example over 2 months).  However if support is tested again within a short time-frame (less than two weeks) then it automatically becomes a short alert.

As we wrote about VMW this morning before the break of the 50SMA -- it's not good risk-reward to buy the second test of support (or major moving average) when it comes so close to the previous one.

All the examples here are similar pattern.   Monday tested 50SMA and bounced.  Wednesday tested 50 SMA again and broke down.