By Christopher Diodato – TradersBase.com
A while ago, I was suggesting Starwood Hotels & Resorts (HOT) as an attractive stock to short. I was expecting a symmetrical triangle breakdown through a support level. Once the level was broken, short positions would be taken. This is, at first, what I saw.
From the looks of it, on may 16, there was a downward breakout. However, in the last two days, this pattern failed completely and broke out to the upside with monster volume. What happened?
What is that line? The 200 day moving average. The 200 day MA is widely recognized by the investment community as a moving trendline which gives traders an idea of which way the market is going. In addition, a popular, low- risk, trading strategy among professionals and trend traders is to buy when the price touches the 200 day MA from above. In essence, the MA can act as a potent support level.
A MA can not only be a support level, but also a resistance level, depending on if the price is above or below the MA. The more used a MA is by the trading community, the more likely it is to become a significant support or resistance level. Some of the most used MA lengths by the trading community are the 20, 50, and the 200 day.
So in HOT, I admit, I should have remembered to look at the MA before my initial post. If I would have, I would have only recommended the trade if it broke beneath the average. I usually dislike using them to trade, but it would be a mistake to brush aside their importance in the markets.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.