This is a guest post by Zev Spiro:
Confirmation is necessary to validate a break of important support and resistance levels such as price patterns, moving averages and trend lines. Technicians and traders define Confirmation in various ways. While market situations vary, below is a guideline of three forms of Confirmation:
- Percentage Confirmation: Confirmation is present when there is a 3% or greater break of a support or resistance level. Volume attached to the break, while not necessary, lends confidence to the confirmation. The 3% rule is commonly used by long term traders and investors. Short term traders use a lesser requirement to complement trading objectives, keeping risk/reward in line.
- Time Confirmation: If there are at least two closes above or below a resistance or support level, then confirmation exists. A close varies based on ones trading time frame. Again, volume attached to the break adds significance to the confirmation.
- Heavy Volume Confirmation: Volume confirmation presents when there is a substantial surge in volume relative to recent volume, combined with one close above or below a resistance or support level.
- Combination: If percentage and time confirmations fall short of the minimum requirement, yet are accompanied by substantial volume (e.g. 1.5% close above resistance with substantial volume), that could be accepted as confirmation.
Investors and traders can use this guideline to develop their own requirements for confirmation as individual investment objectives and time frames vary.
Illustrated below are examples of technical confirmation applied to trade ideas that I recently posted on Minyanville’s Buzz and Banter and in my market letter:
A breakout triggered, and confirmed, in A123 Systems, Inc. (AONE) on January 12th. The neckline (resistance) of an inverse head and shoulders pattern was indicated as the trigger, and Percentage Confirmation was present as the move was greater than 3%. In addition, Heavy Volume Confirmation present. The presence of the two types of confirmation added confidence to the breakout.
A breakout of a bullish ascending triangle occurred in OGE Energy Corp. (OGE) on January 3rd. No confirmation was present and the trade failed.
If you’re interested in receiving Zev Spiro’s market letter, please email zevspiro[at]oripsllc.com with the subject: “add”