MAY17 1633EST. Aruba Networks (ARUN) today rewarded traders willing to execute a simple trade idea: that after a savage, 29 percent overnight drop on a badly-received earnings report, the security would bounce from well-defined, 1-year horizontal support at $12.36.
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| ARUN (Aruba Networks). Apr 17, 2012 to May 17, 2013. Daily candles. |
To be sure, it's often imprudent to take the "catch a falling knife" trade, or put another colorful way, to "stand in front of a speeding bus."
But, on the other hand, well-defined horizontal support or resistance can often present a compelling risk-reward proposition. If a trader buys just above the support level, downside is limited (assuming the trader is willing to immediately cut losses on a violation of the support level) while upside is potentially considerably larger.
Why was ARUN's horizontal support of $12.36 "well-defined" -- and, by extension, worth acting upon? Simply by virtue of being successfully tested after its establishment. On the one-year chart, Aruba Networks first bounced from $12.36 on June 5, 2012 -- highlighted above by a horizontal yellow line. On July 12, 2012, ARUN successfully tested that 6/5 low, reaching an intraday nadir of $12.40. And it again tested that horizontal support area on July 17, reaching a low of $12.37. (Both July lows are highlighted above by another horizontal yellow line.)
