Last week we looked at a chart that appeared to be a good buy set up to many new traders, but was not. It apparently was a very popular article as we received many comments regarding how helpful it was. Since there are similar situations that can arise, we are going to take this week to look at a couple more potential problems you should consider when looking at the VCM buy and sell set ups. Below is our first chart, a daily chart of SILICON LABORATORIES INC. (SLAB). Remember that these concepts apply equally regardless of the time frame. In other words you can use these concepts on a one minute chart just as easily as you can on the daily chart. The only difference is when we discuss the possibility of a stock "gapping", as this only occurs on a daily chart from bar to bar, on intraday charts that only happens once at the beginning of the day, if at all.

A trader may look at this VCM buy set up (VBS) and make many good arguments for playing it. The stock is in an uptrend, and has pulled back with three red bars to the general area of the 20 period moving average. It is finding support on the gap fill and is showing a green bar reversal (GBR). Is this playable? Well let's take a look at this chart again with the same notations on it, but let's look at three or four different areas that may affect the quality of this play.

First of all notice the green dotted line marked "1". This is what we call minor support. It is the prior high that was overtaken on the rally on the way up. We generally want this area to hold on the way down. While "gap fills" can offer some support, they usually do not generate rallies that continue to make new highs as we want to see in a VBS.

Second, notice the green bar at "2". This actually was a VBS that triggered earlier and failed. Stocks that are being aggressively bought may not run immediately after three bars down, but usually do not fail and come down as far as this one did.

Third, notice the 20 period moving average. It is actually heading down at the time the trade triggers. It is not that important that the price is slightly below the moving average, that can be OK depending upon where other support and resistance are. The fact that the trend is already pointing down based on the moving average is a negative that can hurt the play.

Let us look at one more. Here is a daily chart of BROADCOM INC. (BRCM).

Once again, we have a stock that is in an uptrend and has three red bars and a bottoming tail into the area of the rising 20 period moving average. A bottoming tail has formed in a support area and the last advance came on a bullish wide range bar (+ WRB). How did this one fair?

As you might guess, there are some issues with this one also. Once again, we have this issue of filling the gap as opposed to finding support at "1", the minor support area.

Secondly, notice the arrows at "2". They are showing large red bars coming off a prior high at a very steep decline that includes gaps in the bars on the way down. This again shows larger distribution and may be a sign that the uptrend is ending. Gaps can be particularly bad on the pullback, as they trap longs, making them sell the rallies, and decrease the odds of the stock going to a new high.

Sticking to the highest quality setups and understanding the differences that can happen to a chart will help improve your overall success rate in playing the VBS set up.