Bounces & Retests
Bounce and retest setups are reversal strategies. They occur when a significant level of support or resistance or a moving average is approached. A bounce occurs when the stock is trading at a price above a specific level The price action approaches the level, fails to breakdown below the level and reverses back to the upside. A retest occurs when the stock is trading at a price below a specific level. The price action approaches the level, fails to breakout above the level and reverses back to the downside. Volume profiles and candle patterns are key to understanding if the retest/bounce is just a temporary failure before an eventual breakout/breakdown or if a true reversal is taking place.
What to look for:
The stock is approaching a major level of support or resistance or a moving average.
Ideally the stock is making a strong move towards the level and not just slowly approaching it.
The volume should be decreasing as it approaches the key level and/or volumes should increase as a potential reversal is shaping up away from the level being tested.
Timeframe(s): All timeframes (the size of the move is typically proportional to the timeframe it is observed in).
When to enter:
Either on the initial rejection candle if volume is strong, or
After a confirmation candle prints in the reversal direction, or
After a low volume pullback to retest the level after it has initially been breached.
Take profits at 2% and 5% on the way to the next level of support or resistance (either from a price line, trendline or moving average).
Just below (for a bounce) or just above (for a retest) the significant level that you are looking to hold against a breach. Stops are adjusted as new pivots or levels of support/resistance are formed.