So let’s focus on Nvidia, a graphics board maker for the gaming industry. The company rose from mediocrity to become one of two powerhouses in 3-D chips, boards and technology. The Nvidia chipset will power Sony’s PlayStation 3 and ensure its industry leadership for years to come.
A few years back, Nvidia was pushing through a series of highs during its stormy relationship with Microsoft and the Xbox platform. But the highs never showed much follow-through. In fact, price kept falling back, and retesting lower ground over and over again.
What would it have taken for Nvidia to break out of the top of that trading range, or plummet back to the lows at 48? The volume spike on Nov. 29, 2001, offered a possible clue. It concealed a false breakout that caught many longs in a bull trap. Until the stock could absorb overhead supply created by that reversal, it would be tough for a rally to generate momentum.
Swing traders earn their livings by recognizing critical price pivots, like the one on this Nvidia chart. The small Island Reversal was the sell signal they needed to jump into new short sales. More importantly, they could place tight stops just above the small pattern and exit quickly if the market turned against them.