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February 26, 2007
In this
week's free newsletter, we'll take a look at an interesting aspect of Support
and Resistance levels:
Role Reversals.
The market is a fickle beast, there
is no doubt about that. Just like we used to say growing up in the central
plains, "if you don't like the weather, just wait a little while because it
will definitely change." The market is the same way, never acting very
consistent for very long before changing its stripes or the way it is moving.
Trend lines can be just as
fickle. One minute a trend line is support, proving to be a
holding up a stock or an index as price advances. The next thing you know,
the trend line is broken and then becomes resistance. What gives?!
We all know that the more touches a
trend line has, the more valid it becomes. However, even though all good
things (or good trend lines) might come to an end, that doesn't mean that they
will be ignored. In fact often times, things are quite the contrary.
Putting Theory Into Practice
Last week, I highlighted FED as a
potential short sale. The stock had been bouncing along an uptrend line in
recent months, but suddenly it broke right through it with a high-volume
selloff. I was watching this stock as it bounced slowly back to test that
trend line on diminishing volume (which in itself is far from bullish), and an
indicator I sometimes watch in my
TeleChart charting software was indicating
that some heavy selling was taking place as well.
Here's the original chart I
highlighted for members here at TheStockBandit.com, and you can clearly see the
uptrend line had become resistance:
TCNet chart courtesy of Worden Brothers, Inc.
The following day, FED triggered a
short sale, and although it took a day or two to get moving, it ended up being
quite a nice trade for us. The former support which had now turned to
resistance was never exceeded, and the selling indicator proved right as this
stock rolled over hard.
Here's a look at FED tonight after
we covered our short today in this stock:
TCNet chart courtesy of Worden Brothers, Inc.
Clearly, the trend line which had
been providing some nice buys back in December and January still has validity,
but now it is acting as resistance rather than support.
Don't ever underestimate the power
of a support/resistance role reversal, because it can provide some great trades
if you pay close attention when the changes take place.
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Jeff White
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