Wednesday's Lessons: The Power of Resistance and Overbought Markets

The power of resistance levels coupled with overbought markets. That was the lesson for Wednesday. My long exits and short entries could not have been timed any better, and it was all based on resistance levels [R] combined with overbought conditions. A reader asked me how "I knew" what would happen. I didn't know what the market would do, I just based my moves on these two potent factors. It's how I make most of my trades, and it doesn't take any extraordinary intelligence or any mystical powers to make good trades.

Let's take a look at my two SSO trades. I entered on the bottom retest around $26. For the past few days I marked $35 as the first R level at $35, and Tuesday pointed to this level as a good low risk short entry based on the R level, overbought stochastics, and light volume on the upmove. Thus, I exited my long position at $34 (30 percent gain in 7 days) and went short Tuesday. I entered short just above $34 and placed my stop at $36, one point above the R level. I took partial profits at the close Wednesday just above $31 (8 percent gain in one day) and moved my stop to entry to lock in profits.

My target for the remaining short position is the $28-29 range. The fact that volume was up while price was down leads me to believe we'll get some continuation of this move. The $26-28 range is the level I would look to get long again. Note that the current short position is a short term hold within a bullish bottoming pattern. Once support levels are hit, I will go back to trading SSO on the long side.

click to enlarge

On Monday I laid out the plan for the First Solar (FSLR) short trade, and it also worked out well. Again, overbought conditions and R levels were the clue. I entered on the bounce into R while stochastics were already oversold. I love this setup and rarely pass it up.

I took partial profits in FSLR at $159.66 (entry at $176.18) for a one day $1652 gain. I am still short 100 shares and have moved my stop to entry level. My next target is the $140-150 range. I will exit the rest of the position if it reaches that level. That's also the level where one could get long again. The stock looks similar to the bottom setup in SSO, only it has a stronger accumulation pattern. Volume has been solid during the upmove and Wednesday's down move did not beat out Tuesday's volume.

 

Game Plan:

It's too late for me to enter anymore short positions. I am now waiting to get long again. Once the market and stocks hit the support levels I mentioned, I'll enter a few long positions. This could be in a couple of days. The focus list has not changed since Tuesday:

Longs: DRYS, ALK, CLF, AVAV, WYNN, LVS, APOL, CPLA, EDU, AAPL, UAUA, DV RSX, URE, EZA, DIG, EEM, UYM, UYG, DAG and SSO.

 

Shorts: FSLR, BWLD.

The key to this market is to be patient and wait for price to setup near support and resistance levels while conditions are oversold or overbought. This is the only "edge" I've found in the  current market, but it's a potent one when traded correctly.

Comments

[leh:]

Great piece, Paul--thanks for sharing. You have yourself a new subscriber.

2008 Nov 06 08:49 AM

[pshah:]

Paul, good article but please explain how UAUA is on your long list right now. It just hit resistance and looks like its on a downward trend.

2008 Nov 06 10:42 PM