Watch Out For Important Price Levels
Cisco Systems Inc. (CSCO)
is an excellent example of how a stock reacts when it hits its important price
levels. This morning before the open, UBS Warburg upgraded Cisco from hold to
buy and also raised its price target from $20 to $24. As you can see on its
daily chart below, CSCO closed just below the top of a channel Friday, and its
50-day moving average sits just above the channel. Needless to say, I will be
focusing on two kinds of trading opportunities — a breakout or a breakout
failure.
Cisco gapped open above the channel,
and within 30 minutes of the open, it hit the 50-day moving average. As you can
see on its five-minute chart below, the stock struggled to break above the
average line, and this was the sign short sellers were waiting for. The stock
retreated. By 10:55 a.m., Cisco was trading just above the top of a channel and
began to move sideways. I believe many traders established short positions
around 18.83. (The upper red line indicates the level of the 50-day moving
average, and the lower line shows the level of the top of a channel.)
There was one more element that
helped the successful short selling of Cisco this morning. While the stock was
laboring to move above its 50-day moving average, the Nasdaq Composite Index
started to reverse to the downside. This weakness encouraged short sellers to
establish their positions.
It pays to watch important price level of the stock.
Eddie