What is a Technical Rebound?
A technical rebound is a rebound of price during a downtrend, or after an abrupt selling. The main reason of a technical rebound is because of bargain hunting, where buyers are afraid to miss the short term trading opportunity and willing to buy at a higher seller's price.
Despite the price rebound due to bargain hunting, technical rebound at a downtrend is different from a rebound during an uptrend. (Please refer to chart 1)
Comparison of rebounds during Up and Downtrend.
Chart 1: KNM – 7164, chart from 5/10/2007 to 27/03/2008.
As indicated by the T1 uptrend line, arrow A, B, and C, are the rebound above the uptrend line, thus suggesting a rebound of price to resume its uptrend movement. If an investor is buying with A, B, and C rebound, he is buying into a uptrend. Contrary, T2 is a downtrend, and arrow D, E, and F are technical rebound during a downtrend. Notice that after the rebound of D, E, and F, price failed to break away from the downtrend, but resume its downtrend movement, even making new lows. Therefore, an attempt to at D, E, and F are only meant for short term trading for it is against the trend.
Advantages and Disadvantages of a Technical Rebound:
For a skillful trader who understand the behavior or a technical rebound, coupled with experience, he or she could take advantages of the short term technical rebound, making quick profit without following a major trend. However, the risk in trading on rebound is still high and therefore, a short term trading play should always associated with a cut-loss plan.
Indicator reference of a technical rebound:
Bollinger Bands Pull-back effect:
After a sharp fall of price breaking below the Bollinger lower band, investors could monitor the price for a possible rebound. When price stopped falling and started to rebound, it is a beginning of a pull-back effect, and the target of the pull-back effect is at the Bollinger Middle Band. Short term trading could speculate the pull-back effect with a proper trading plan.
Due to the high risk nature of trading at rebound, investors must carefully study the market condition and also the upside room between the rebounding price and the Bollinger Middle Band, to make sure that the upside potential is sufficient or else, it is not worth speculating on the pull-back effect. (Refer to Chart 2)
Chart 2: Petra – 7180, chart from 8/05/2009 to 27/08/2009.
As indicated by A, price of Petra dropped sharply, breaking below the Bollinger lower band, and therefore, suggested that the selling was over-sold, thus a good chance of a pull-back effect as a form of technical rebound. Short term trading could buy at the first day of a rebound with the latest low (RM 2.46) as the cut-loss point. Generally, the first target of a pull-back effect is at the Bollinger Middle Band, and if price should break above the Bollinger Middle Band, then only there is a chance of Petra to regain its strength. On the other hand, if price should resisted by the Bollinger Middle Band, it would be a signal to take profit.
Stochastic breaking above 30% and 50%:
The Stochastic is a short term indicator to help catching early rebound signals. When the Stochastic rises and break above 30% and 50% level, it suggests that the price is rebounding, a beginning of a technical rebound. This can be viewed as a short term trading signal, provided that investors is taking the recent low as the cut-loss point. (Study Chart 3)
Chart 3: Tebrau – 1589, chart from 8/05/2009 to 27/08/2009.
As indicated by A, the Stochastic rose and broke above 30% and 50% level, suggested a beginning of a technical rebound, thus a short term trading opportunity for short term trader. As indicated by B, the Stochastic fell below 70% level, suggesting that the short term movement of Tebrau was weakening, thus a signal to take profit.
As circled at C, the Stochastic is now below 10%, suggesting that the price of Tebrau is due for yet another technical rebound. However, investors should monitor the Stochastic, and the Stochastic has to break above 30% and 50% level to signal a beginning of a technical rebound, and then, the first cut-loss point will be at RM 0.70 level.
MACD histogram Rounding Bottom:
Chart 4: MMCCorp – 2194, from 8/05/2009 to 27/08/2009.
As indicated by A, the MACD histogram of MMC Corp formed a Rounding Bottom, suggesting that the price of MMC Corp is having a technical rebound. If investor should decide to buy for short term trading based on this signal, the first cut-loss point is at RM 2.26 level. If the MACD histogram should continue rising, the technical rebound is expected to continue until the MACD histogram should form a Rounding Top.
Short term trading signals:
Since these short term trading signals are mostly from Secondary Indicator, and when the trading signal is triggered, it has not been confirmed by the Bollinger Bands bullish signal, thus a trading signal against the trend. Therefore, short term trader should always have a trading plan with a cut-loss point, and knowing his maximum loss before deciding to take the short term traders.
Conclusion:
In conclusion, short term trading play is a high risk trading method, but if done skillfully, short term traders could obtain a quick profit from a short term rebound. Therefore, it requires professional skills of technical analysis and experience, and it is not suitable for long term nor conservative investors.
Copyright © 2009 Straits Index (M) Sdn BhdImportant Disclaimer:These content provided by Straits Index (M) Sdn Bhd is solely for education and information purposes only, and do not suggest any investment advices. All information displayed are believed to be accurate and reliable. Interpretation of the data or analysis is at the reader's own risk. Straits Index (M) Sdn Bhd reserves the rights but obligations to update, admen, or even terminate the materials. 重要声明:以上的内容由海峡指数(马)私人有限公司提供,纯粹是教育性质, 并不是任何的投资忠告。所有资料显示认为是准确和可靠的。对数据或分析的解释和用途是在于用户自己的风险。海峡指数(马)有限公司持有保留及义务更新,甚 至终止材料的权利。
Source : WinChart, Straits Index (M) Sdn Bhd http://www.straitsindex.com/
