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Chapter 5. Fundamental Volatility > Guidelines for Treatment of Exceptions

Guidelines for Treatment of Exceptions

It is reasonable to remove the spikes in both of the previous examples. Under the “rules” of technical analysis, when support or resistance levels are broken, the breakout implies a change in the trading range. Spikes in these examples did not follow those rules. The attempted breakout did not succeed; so what is the technician supposed to conclude? If we look at the broader trading range over a period of months rather than weeks or days, we see that it makes sense to discount the significance of the spikes. Even on a purely technical level, an unsuccessful breakout should be ignored because it does not change the longer term trend.

The trading range is more stable and predictable with the removal of those exceptions. In the case of JPMorgan Chase, except for the single exception to the upside, the technical resistance level of $62 per share held over a 30-month period, and the support level grew from 37 to 42, again over a fairly long period and again removing the unsuccessful downside breakouts. This preliminary technical analysis changes the overall picture. It is appropriate even under the generally accepted rules of chart analysis. A breakout should be defined as significant or meaningful only if it leads to a subsequent new trading range.


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