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Use your retracement

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Every trader/investor has different time horizons for their trading strategies. While we like to use the point and figure charts to help ascertain potential upside/downside and the various probabilities associated with the different point and figure chart patterns, we also like to use the "fitted" retracement techniques to try and uncover levels of potential market maker support in NASDAQ listed stocks (4-letters or more in the symbol).

In the 01:00 EST Update, we mentioned that shares of Qualcomm (NASDAQ:QCOM) $23.57 -7.74% gave a triple-bottom sell signal at $24 today. That "$24" level is deemed rather significant on a supply/demand basis and something a bar chartist may want to honor. One can imagine that up until today, the MARKET was willing to support the stock just above that level, but today's lower price indicates that supply is once again outstripping demand. Here's what I think market makers are doing in the stock as they have to begin assessing further downside risk.

Qualcomm Inc. Chart - Daily Interval

I like to take the upper-end of my retracement to a relative high. It would do me little good to anchor the "base" of the retracement at the lows, as QCOM violates those lows. If I were a market maker, how would I adjust my inventory or trading strategy if the stock continues to sink lower? Past support had been at the $25 level (from point figure) and this is a level I want to try and correlate again. By "sliding" or "fitting" my retracement at those levels, I find some pretty good correlation with past trading at $32 and $24.75, which may have been levels where market makers had the stock "collared" and were measuring some buy/sell side order flow. Today's action makes it rather apparant that there just aren't enough buyers in the stock and sellers are getting more aggressive. Last weeks action at 50% retracement of $28.39 looks suspicious as if market makers were looking to sell the stock into strength and may now be further bearish the stock below those levels and assessing downside risk near-term to $18.90 at 19.1% retracement. In essence, a shorter- term trader that is bearish the stock now has a downside target to look to capture gains on today's break lower at $24.

We also get some nice "tie in" with the point and figure chart. The 61.8% retracement at $32.01 ties in nicely with what would be a "buy signal" on the point and figure chart at $32. Depending on a bearish trader's tolerance for risk, a stop loss could either be placed at that level, or just above the $24.76 (38.2% retracement) or $28.39 (50 retracement levels), with near-term target again being 19.1% retracement of $18.90.

I'm getting inundated with subscriber e-mail looking for bearish target levels in various stocks that are hitting new 52-week lows. Try using the above "fitted" retracement technique like we've also taught in the past to identify potential support levels where a market maker may turn into a buyer as he/she provides liquidity to sellers, yet maintains a proper risk/reward balance in his/her inventory.

At the same time, check the bearish vertical counts of stocks your trading short, just to make sure that there is at least some type of "hint" that the stock you're trading bearish has some longer-term bearishness associated with it so that a bearish target from retracement can be met.

Jeff Bailey
Senior Market Technician
Option Investor


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