When a stock has an obvious level of support, often the smart money will use that level to “run stops.”
What happens is that if too many people are anchored on the same level, there will be a bunch of stops just under that support level.
So when that level is hit and lost, many will get stopped out only to have the market reverse back above that level.
YHOO has an obvious level of support at 48.30 that was breached yesterday. If you are a trader who has picked up a position over the past two months, odds are you’ve been watching that level and possibly made a decision to close once that level was breached.
The stock is now set up for a failed breakdown trade. If the stock can close back above 48.30 in a short time, then it has a high probability of retesting the other side of the range at 51.
But if this level “sticks” and fails to find fresh buyers, then the stock will roll over further down to the mid $45 zone – that’s why it is important to wait for confirmation of strength instead of just blindly buying any support level.
