This is why my stops are mental

It drives me nuts every time I see this, although I don't know why it should bother me. If you've read my risk management link or have been around for awhile, you know that I never want orders on the books, I set alerts and keep stops and limit orders mental. When you put orders in with your broker, you're telling Wall Street what you will do and where or when you'll do it, it's just not a good idea and while this example is a big one that you might not feel personal about, I have had stops in individual stocks I placed when I went on vacation, hit to the penny, as in my stop being hit was the day's low and the stock ran up after that. So it can effect your personal positions. The second component of what bothers me is the mentality that traders have that support and resistance are EXACT numbers. If you sit down and think about what creates support and resistance in an emotional context, because most of what moves the market has an emotional component, and if you put yourself in the position emotionaly, you'll understand that support and resistance are areas, not EXACT numbers.

What do I mean. Example: I bought XYZ for $10 at what I think is good support, it drops down to $7.50, I didn't honor my stop, I have half of my portfolio in this stock (all bad ideas) and I'm pretty emotionally burdened by the loss. Then the market moves up, XYZ follows, it hits $8, $8.50, $9 and all I can think of is, "Maybe I can get out at what I paid and have a flat trade". However, at $9.75, the market starts to fall apart. What do I do? I probably sell and take a $.25 loss instead of a 25% loss and feel pretty good about it. When a bunch of people do something similar in XYZ, it creates an area of resistance. As a matter of fact, nervous traders will start selling before $9.75 after taking an emotional hit like that, so the point (although I may not have given you the best example) is that support and resistance are found in emotions and thus they are areas, not exact numbers. However, traders will do this over and over and over and put their stops at an exact number. Take a look at what just happened in the SPY.

They take what was the prior low, where the market bounced a bit and put a stop right exactly there. Look at the volume jump as all those stops just got hit (some short limit orders are probably in there as well). You see that spike as price dips a penny below the former intraday lows?

Many times price will bounce right back up, it's called a fishing expedition. Wall Street sees all of those stops sitting there and it's a pay day, just hi them by one or two cents and they collect on the spread on volume rebates, if they run price back up, they stole your shares on the cheap.

OK, I'm done with that rant. Otherwise, today looks like a good day for a market reversal. See my earlier market update on the ascending wedge scenario. Oh and just for giggles, lets see if they run price up through that trendline again, traders will buy it and should they run price back down again, you have the same concept, just a different scenario.