One Of My Favorite Setups
I’m Dave Landry and I approved this column.Â
TA 101
Someone recently brought up the fact that newer readers may
not be familiar with some of the technical analysis terms/concepts that I use in
this column. Therefore, from time to time, I will discuss these basic terms of
technical analysis and how I interpret them. Let’s take a look at support and
resistance.Â
The longer a stock trades at a certain level, the more that
price will be perceived as a value zone. Stocks find “support” at
these levels because people see them as fairly priced. When a
stock price begins to rise, it can be seen as being overpriced. People may be
inclined to sell them at this higher level. When this occurs repeatedly, resistance is
formed. Resistance and support can be identified by simply drawing a
horizontal line above multiple highs and below multiple lows respectively.Â
What’s interesting is, support, once broken, becomes
resistance. Why? Because those that bought at the “support” level may
be looking to get out breakeven. Often you’ll hear me talk about “overhead
resistance.” This is a zone where a significant amount trading has occurred
and once approached, will become resistance as those players who bought in this
area may be looking to get out whole. Â
On Friday, the Nasdaq sold off hard in early trading. It
found its low fairly quickly and then worked it way higher for much of the day
in a wide-loose-manner. Finally, it resumed its sell off going into the
close. Â
This action keeps it below its 200-day moving average–a level that corresponds with short-term
resistance.Â
The S&P put in a similar performance but managed to
hold on to more of its intra-day gains. Â
So what do we do?  Although I run daily
relative strength shorts (vs. the S&P) to determine the strongest (weakest)
sectors, I often like to just tool through all 239 that are in my database. An
tonight, an overwhelming number of these sectors are either making a transition
lower (i.e. a top) or are in bona fide downtrends. This action is confirmed by
numerous shorts generated by my database an no meaningful longs. Therefore, the
song remains the same: the market direction remains down, the vast majority of
sectors are headed lower, and stocks themselves are in downtrends. Considering this,
continue to look to play the short side.Â
When a stock hits a new high, everyone who owns that
stock is profitable. However, these profits quickly evaporate as the stock drops
from these levels. Selling then begets selling as more and more investors are
forced out of their positions. Therefore, one of my favorite setups to look for
is pullbacks in downtrends (especially persistent downtrends) from
multi-year highs. With that said, Ingersoll-rand
(
IR |
Quote |
Chart |
News |
PowerRating), mentioned Thursday
night and in the weak
manufacturing sector, looks poised to continue its strong downtrend (from
multi-year highs) out of a pullback.
Best of luck with your trading on Monday!
Dave Landry
P.S. Reminder: Protective stops on every trade!
P.P.S. My new 20-hour course is now shipping.
Click here to learn
more, or to order.