EW is interesting. It's close to major 67.00 resistance and looks like it's on an unbroken trajectory to test that level. If it gets close, I'll bet everyone who wished they'd taken profits last July will sell like crazy. I'll set an alert for when it reaches 66.00. Thanks!
Since I really enjoy writing (in case you havenât guessed), I document a lot more in my regular trading journal than I post in this on-line journal. I know several people reading this thread are beginners, and several more are a notch-and-a-half above beginners (like myself), so I thought it would be informative to post what Iâve learned over the past several months about support and resistance and the price action that can occur at those levels. Last summer an ETer asked the ET community: âWhy do you care so much about having an edge? I know having an "edge" is necessary for being a profitable trader. It's true that we should all be constantly tying to refine and make our edge more effective...however that's all anyone ever talks about on this site. T/A, PA, fundamentals, support/resistance...all that is fine and good but it seems to me that your edge is a small factor in determining your trading success. The main and most important factor is your mental state, how you THINK, your head game. Yet edge and method threads outweigh mental threads probably 20 to 1. Is this the reason why so many traders fail?â I posted a reply: âSupport and resistance constitute the âhead gameâ of those who are playing the same game as you. Support and resistance levels within your trading time frame tell you where the majority of people playing the game wished they'd gotten in or out of a position. Support is that price level where people wish they'd gotten in before and they pile in now; resistance is that price level where those who piled in at the high end of the last uptrend and got burned desperately want to get out at least at break even. When a support level is broken, stops get triggered and prospective buyers will wait for the stock to hit the next lower support level to pile in. When a resistance level is broken, buy stops are triggered and the short squeeze ensues. The price may then pull back and resistance may be tested again. If resistance is tested strongly more than once it tends to weaken, because the many of the shorts covered. When that weakened resistance level is then broken, prospective buyers may fear the stock price will run away from them and they may pile in at that point. Will the breakout hold up? It will if there are now more buyers wanting in than there are people who bought at that level before and got burned. The mental toughness you need as a trader is the patience to wait for strong setups based on S/R levels, improving your probability of success, rather than the desire to "make something happen" where action is unwarranted. The other mental toughness you need is the ability to cut losses based on an advance plan WITHOUT HESITATION.â (Itâs interesting that I knew this last bit intellectually, yet at the time I would often put on trades without an advance plan, or have a plan and then change it. And I still sometimes âmake something happenâ instead of waiting for the strongest setups.) Since that post, Iâve learned more about factors that influence S/R behavior. For example, âsupportâ lost all meaning last fall when redemptions forced institutional investors to liquidate en masse. Fundamentally sound companies were hitting 1-, 2-, and even 5-year lows. How many times did you find yourself asking, âHow low can that one go?â as P/E ratios on many stocks dropped below 5 and some were trading at book value? (I wish Iâd been a smart experienced trader during all this! The answer to "How low can it go?" in a bear market is "MUCH lower than it is now. Short at will!") I also earned that in a bear market, a pull back in price rarely retraces more than 50% of the way to the previous resistance level before resuming a downtrend, because there simply arenât enough buyers in the market to move the price higher. I learned that most rallies to new highs that seem as if theyâll never end (because everyone still IN the market is looking for shelter in a storm) eventually tire out and when they fall, they can fall hard. Two strong examples of this are: HW in August making a 20-day uninterrupted climb to 52-week highs, only to drop more than 50% during the crash, fail to retrace even half of that loss, then drop more than 50% again; and APOL steadily making higher highs and higher lows during the entire market downtrend, climbing to 3-year highs last month, only to lose nearly 15% in a few days. Being a new trader, I experienced bear market rallies for the first time. A bear market rally is ignited by hope and greed, and fueled by short covering, so it can be quite powerful. A lot of smart traders were short from last May and as the Big Picture bleakened, shorts continued to sell every rally on the way down. Some stocks accumulated a short interest of over 20%, meaning it would take many days for all the shorts to cover should any good news spark a rally. In a bear market, especially one where such a massive washout occurred in just a couple months, many investors want to get in at or near the bottom. They know the market historically leads the economy by about six months. A hint of good news (the ignition spark) can send stocks soaring as hope and greed convince people to buy now before the price goes up too much (there's the fuel). But there's a lot more fuel on tap. Here's what happens: A company whose price was driven down in the crash suddenly beats earnings and raises guidance in very bad economic conditions, leading to a major gap up. The market opens and buy stops are triggered like crazy by the gap. At the same time, investors pile in to get a piece of a good thing before the price runs away from them, and trend-following day traders catch the wave, too. This drives the price up further, triggering buy stops from the stronger hands who were willing to take some heat before bailing, which in turn drives the price yet higher. Shareholders prior to the gap are grinning from ear to ear and not even considering selling at this point, demonstrating beautifully the concept of supply and demand. In fact, the closer the price is to its last major resistance level, the better the chance it will break through and wipe out all hope from the strongest shorts, causing them to cover, and driving the price even higher when it seemed it could not possibly go any higher. Why? 1) Close to previous major resistance, fading traders are putting on new short positions, and setting buy stops above the major resistance level. Any break through resistance will trigger these stops and drive the price higher. 2) Most of the current shareholders are not in any pain. In fact, most of them are likely profitable, especially if the last major resistance level was a sharp point on the chart rather than an extended period of range trading near that level. A sharp point of resistance on a daily chart means a limited number of people bought at the highest price levels (many of them probably shorts covering), so there probably arenât a lot of holders at that price desperately wanting out at break even. A great real-world example of this was BWLD (chart attached). Even when the economic picture looked quite dire from July through October, and most stocks were on a steady downward trajectory, BWLD was climbing like crazy all the way to 45.00 before the Sept/Oct crash. October provided an earnings miss and the stock fell 60% in two months to hit 2-year lows in November. From November lows it attempted a 50% retracement of the drop, and failed. So we now have a stock that failed to retrace 50% of its loss, failed even to test its 200-day MA, made a lower low on 1/15, then a lower high on 1/27. Traders are seeing âshortâ written all over this one, and by the end of January, the stock has accumulated a 26.3% short interest. Last week, BWLD closes before earnings just under 22.00, a long way from the 45.00 price they enjoyed such a short time ago. They easily beat earnings estimates, same-store sales are up significantly, and they affirm their generous 2009 earnings guidance. They open the next day @ 27.25, nearly a full 50% retracement of the entire move down from highs and now sitting right on its 200-day moving average. All the shorts from November 4th onward are in pain, sparking the whole scenario outlined above. If you are a gap fader, this one was NOT the gap to fade because of the short interest, the fact that it had fallen so far, the strong earnings and balance sheet of the company, and the fact that the prior major resistance area was a very sharp point on the daily chart, so the majority of current shareholders are most likely profitable and not about to sell cheaply. Sure enough, from the gap it rose another 2.00 a share on Thursday and then on Friday gained almost another 1.00. These are a few of the additional factors I now look at when considering trades based on S/R levels. I hope this is helpful!
Was going thru some posts at start of journal.. congrats on the progress. Shall be participating now in a attempt to learn trading during mid-market hours. Yup.. watching L2 can save a lot in executions, more so in news initiated movements I bet these guys freak out in almost all stocks... even in QQQQ in premarket. They'll just escapes all the offers and let the stock spurt up considerably on no volumes... just to scramble the buyers.
+ $942 Friday I had an IDCC target order which I thought was a day order but found out was GTC when it filled this morning @ 32.25 for a $180 gain. Not complaining about making money, but I couldâve snared three times as much. I need to check my order status end of each day. HOTT dropped nicely and I had a target at 8.88 based on 8.85 being a fairly stable support level back when they announced strong same-store sales. I had my cover order placed through ARCA so I could show minimal shares (thinly traded stock), and when it made a much lower high and weakened, with the bid @ 8.89, I cancelled ARCA, and went to cover at market when the ask reached 8.81, and it said I didnât have the shares. So I then saw that the ARCA order cancellation was pending, not cancelled. Called Etrade to find out that ARCA was having issues and since the price dropped through my price, they said my filled order would eventually post. When it finally posted, it was at 8.79 for a $690 gain (sure beats the $420 I thought I had). Liked the uptrend on GOLD and looked to go long on a pull back. Bid 49.65, just above previous support, but too deep, as it only hit 49.74 before continuing the move up, and I didn't wan to chase something that had already gained so much on the day. Offer to short HOTT @ 9.10 finally filled piece by piece near dayâs end. Initially planned to hold unless 8.93 target filled, but decided to cover @ 8.98 last minute to stay flat overnight. This was a perfect trade, in at the top and out .01 cent from the bottom of the move for a $120 gain.
Friday I had an IDCC target order which I thought was a day order but found out was GTC when it filled this morning @ 32.25 for a $180 gain. Not complaining about making money, but I couldâve snared three times as much. I need to check my order status end of each day. .......................................................... Touche Nod! It's great that we can post our mistakes, then post a +900 day.......keep it up! .............................................................. Nodoji:I also earned that in a bear market, a pull back in price rarely retraces more than 50% of the way to the previous resistance level before resuming a downtrend, because there simply arenât enough buyers in the market to move the price higher. ........................................................... I don't think anyone can be a true trader until they witness a full cycle in the market: 1. uptrend 2. base at top 3. downtrend 4. base at bottom learning to trade in each stage is essential in trading for a living IMO........stepping off my soap box teach on teacher!!!!
like your posts a lot as it shows how you are learning more and more. you mentioned in earlier post that you were researching faz and fas. let me know what you find; looking forward to it. thanks.
Bos, geez, thanks for the encouragement! elit, FAS looks like an excellent trading vehicle, with pure liquidity and a price that gives flexibility to any account size. (Win, does your firm need a marketing rep?). FAZ, on the other hand, appears to derive second-to-second pricing from a random number generator