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Trader's Corner

Waiting for the Retest

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You waited and watched through much of 2004. A neutral triangle had been forming on Phelps Dodge's (PD) weekly chart over a six-month period from February until August. By early August it was narrowing to its apex, and you expected a break. Because the triangle had formed at the top of a rise, you expected the break to be to the upside, too, but you didn't act ahead of the signal. You waited patiently for that break, knowing how dangerous it would have been to anticipate the signal.

Annotated Weekly Chart of Phelps Dodge:


 

Unfortunately, your daughter didn't exercise the same patience. She tried out her new gymnastics feat on your lawn instead of waiting for her time on the forgiving gymnastics floor during class. She tore her ACL. A surgery later, when you could finally return to your trading screen, you realized PD had broken out of the formation. It broke to the upside as you had expected. You had lost your opportunity to enter the play.

Or had you? You could have waited for the rest of the broken resistance to see if it held as support.

Annotated Daily Chart of Phelps Dodge:


 

After breaking through a trendline or formation, prices often move briskly in the direction of the breakout, consolidate and then head back for a retest. Thomas A. Meyers advises in THE TECHNICAL ANALYSIS COURSE that pullbacks to broken trendlines offer great new entries for bullish or bearish plays. Meyers calls these "pullbacks." Pring of TECHNICAL ANALYSIS EXPLAINED fame calls such moves "throwbacks." Whatever they're called, conservative traders often wait for such pullbacks or throwbacks before considering an entry.

They're not always offered, of course.

Annotated Daily Chart of the OEX:


 

Look for retests on intraday as well as daily charts, and for retests after breaking below support as well as above resistance.

Annotated 30-Minute Chart of ELY:


 

Those who enter at the first breakout often have to suffer through a retest, while those who wait for the retest don't share that suffering. Stops can be tight, too. Perhaps more importantly, those who wait for the retest can watch the shape of the move to retest the breakout level. That's important. Traders want to see a corrective-type move back to retest, with a tight-ranged zig-zagging back to the broken support or resistance. While a small violation of the former resistance or support might be acceptable, those waiting for a new entry on a retest don't want to see the kind of action depicted in the following chart.

Annotated Sixty-Minute Chart of VZ:


 

That immediate expansion of volatility offered a warning. So does a sideways break out of a formation or below or above a trendline.

Annotated Thirty-Minute Chart of the SPX:


 

In addition, Thomas Myers warns that upside breaks on low volume or downside breaks on high volume remain suspect.

Despite the warnings and the risk that a move will run away without ever retesting a breakout point, waiting for retests offers benefits to conservatives traders. It offers benefits to aggressive ones, too, if they happen to have children prone to injuries or even bosses who suppose that they ought to occasionally attend meetings or otherwise occupy themselves away from the trading screen. Don't assume that the move has happened without you if you miss that first breakout or breakdown.

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