Buy at Support - Sell at Resistance

[firewalker99]

Areas of Gathering Resistance serve as pivotal areas on a chart; they are areas where the price of a rising stock will invariably pause before deciding what direction to take next.

Tuesday's 5-Minute Chart demonstrates how vital it is for traders to know the exact location of areas of Gathering Resistance.

A short position established within Monday's 8-cent area of Gathering Resistance yeided an impressive profit on Tuesday:

Hi Mr Nasdad, I was wondering if you look at the "big picture" too, a chart with daily bars for instance, showed a small trading range doji-like bar, which was the third in a row of declining ranges with each lower volume. These were all indicators (imo) that we were at the top of a range and ready to fall back a bit...

 

[Mr_Nasdaq]

Composition of 'Gathering Support' and 'Gathering Resistance'...

Hi Mr Nasdad, I was wondering if you look at the "big picture" too, a chart with daily bars for instance...

Hi firewalker,

Yes, I look at the 'big picture', too.

In fact, the areas of Gathering Support and Gathering Resistance that I highlight on each of my 5-Minute Charts are composed of individual aspects of Support and Resistance that are gleaned from Daily, Weekly, Monthly and 'Point & Figure' Charts.

Don't let the fact that I use a 5-Minute Chart to display an area of Gathering Support or Gathering Resistance fool you into thinking that you are looking at short-term information.

For example, Monday's area of Gathering Resistance between $42.52 and $42.60 (see Post #81) was composed of individual aspects of Resistance from the Weekly and Monthly Charts and, therefore, had the attention of longer-term swing-traders (as well as day-traders).

***********

You are correct in your observation that a series of rising candlesticks on declining volume, culminating in a Doji Candlestick, is often a warning that a rising price is on shaky ground.

 

[roguetrader]

The series of rising candlesticks on declining volume that you describe is known as a 'Bear Flag' Formation. It's called a 'Bear Flag' because it most often leads to lower prices, as it did today (Tuesday).

Hi Mr_Nasdaq personally I would not consider the pattern firewalker has posted to be a bear flag, for either a bear or bull flag to form the flag must be preceded by an appropriate impulse move, in the case of a bear flag this impulse will be downwards, and in the case of a bull flag the impulse would be upwards, the flag then generally slants against the impulse, the closest thing to what he has posted would be, at best, a rising wedge.

 

[Mr_Nasdaq]

I stand corrected...

Hi Mr_Nasdaq, personally I would not consider the pattern firewalker has posted to be a bear flag, the closest thing to what he has posted would be, at best, a rising wedge.

Hi roguetrader,

It was the 'rising price on declining volume' feature that threw me.

I have corrected the post that was in error.

Many thanks...Mike

Rising Wedges:
http://stockcharts.com/education/ChartAnalysis/risingWedge.html

vs.

Bull and Bear Flags:
http://stockcharts.com/education/ChartAnalysis/flagPennant.html

 

[Mr_Nasdaq]

SNDK - Tuesday's 5-Minute Chart....

An area of Gathering Support (Buy Alert) between $59.87 and $59.90 was identified for the popularly traded stock, SNDK, going into Tuesday's trade, and so it was found to be.

After printing a low of $59.75, Support was found.

SNDK rose $1.20 to a subsequent high of $60.95:

 

[Mr_Nasdaq]

QQQQ - Wednesday's 5-Minute Chart...

The QQQQ continued its heavy-volume pull back on Wednesday from Monday's area of Gathering Resistance (Sell Alert) between $42.52 and $42.60.

Wednesday's 5-Minute Chart shows a gap-up open (a positive reaction to the 8:30am CPI Report) that found Resistance at the declining '200-Period Moving Average'.

On Thursday, three Economic Reports have the potential to move the market:

1) 8:30am - Jobless Claims
2) 10:00am - Leading Economic Indicators
3) 12:00pm - Philly Fed

A 3-member area of Gathering Support between $__.__ and $__.__ resides below Wednesday's closing price. Do you see it? (Hint: 2 members come from the Daily Chart and 1 member comes from the Weekly Chart.)

 

[Mr_Nasdaq]

QQQQ - Thursday's 5-Minute Chart and 'Max Pain'...

The QQQQ didn't know whether to continue its pull back on Thursday or whether to rally ahead of after-hours earnings from BRCM, GOOG, RMBS and SNDK. So, it did a little of both before closing up a dime on the day.

Thursday's 5-Minute Chart displays the QQQQ's state of confusion.

On Friday, the last day of Options Expiration Week, who knows?

All we know for sure is that there is an area of Gathering Resistance (Sell Alert) above and an area of Gathering Support (Buy Alert) below ... and that Max Pain for the QQQQ stands at $41.00, although $42.00 is a close second.

Max Pain is that price at which most of the outstanding Put and Call Options will expire worthless. Max Pain for the QQQQ and other stocks may be found at the following web site:
http://www.iqauto.com/cgi-bin/pain.pl

 

[Mr_Nasdaq]

QQQQ - Friday's 5-Minute Chart ...

The pull back by the QQQQ from Monday's area of Gathering Resistance between $42.52 and $42.60 has been shallow thus far, not yet having tested short-term Support at the rising '20-Day Moving Average'.

Friday's 5-Minute Chart shows that the QQQQ, having printed a subsequent low of $41.59, has repeatedly bounced from that line, thereby, giving $41.59 special significance in the coming week.

On Monday, traders will focus, initially, on very short-term Support at $41.59 and very short-term Resistance at $42.11 as highlighted on the 5-Minute Chart below.

Traders will also focus on the MACD Indicator on the Daily Chart (not shown here). It is at the same early stage of a "Sell" Signal from which it recovered once before. Will it recover again or is it time for more than just a shallow pull back?

Any upside in the QQQQ will meet with Gathering Resistance between $__.__ and $__.__.

Any downside will meet with Gathering Support between $__.__ and $__.__.

If Gathering Support is violated by a QQQQ that begins to close below it, then something more than a shallow pull back may have begun.

 

[Mr_Nasdaq]

QQQQ - Monday's 5-Minute Chart ...

The QQQQ demonstrated on Monday that it's not yet willing to deliver any more than a shallow pull back to its magnificent rally which has traded above the steeply rising '20-Day Moving Average' since mid-August.

Monday's 5-Minute Chart displays an extremely rare day in which a rising QQQQ failed to pause before capturing Gathering Resistance.

It also shows a 'sloppy day' in which the QQQQ, having captured Gathering Resistance in the morning, began to use it as Support, but then, dipped back below it in the afternoon before recovering to close within its boarders. (The dip was perhaps to make up for the pause that was not taken in the morning.)

On Tuesday, the QQQQ is poised to challenge Resistance at its recent high of $42.62.

A capture of that Resistance would open the door to a test of Resistance at the 2006 High of $43.23.

In order to perform such a test on Tuesday, however, the QQQQ would have to slug its way through a substantial area of Gathering Resistance between $__.__ and $__.__

 

[Mr_Nasdaq]

QQQQ - Tuesday's 5-Minute Chart ...

The QQQQ delivered an 'inside' day on Tuesday on easing volume ahead of Wednesday's FOMC meeting.

Tuesday's 5-Minute Chart shows the QQQQ displaying little interest in testing the day's area of Gathering Resistance between $42.60 and $42.62.

On Wednesday, the QQQQ will focus on the FOMC interest rate announcement, scheduled for the usual time, 2:30pm (EST).

Many traders sit on their hands and refuse to trade immediately after an interest rate announcement because of the extreme volatility that ordinarily follows. It's a custom that I would recommend to you.

 

[Mr_Nasdaq]

QQQQ - Thursday's 5-Minute Chart ...

The QQQQ printed a new high on Thursday for its unceasing rally.

Thursday's 5-Minute Chart shows that although the QQQQ detected Gathering Resistance, pull backs from that area took the shape of a bullish 'Cup & Handle' Pattern from which the QQQQ broke up and out at 1:30pm (EST).

For more information on 'Cup & Handle' Patterns, click on the following StockCharts.com link:
http://stockcharts.com/education/ChartAnalysis/cupHandle.html

On Friday, the QQQQ will trade initially on the much anticipated Third Quarter GDP Report.

A substantial area of Gathering Resistance lies between $__.__ and $__.__

 

[Mr_Nasdaq]

Gathering Resistance is a 'Sell' Alert...

The following 5-Minute Charts from Friday's trade are visual examples of the advantages of selling/shorting at an area of Gathering Resistance:

 

[Mr_Nasdaq]

QQQQ - Friday's 5-Minute Chart ...

The QQQQ demonstrated on Friday that it has not forgotten how to pull back on heavy volume.

Friday's 5-Minute Chart shows the QQQQ falling to within 1 cent of that day's area of Gathering Support before bouncing modestily into the close.

On Monday, any further pull back in the QQQQ will find it testing Gathering Support between $41.81 and $41.82.
Monday's area of Gathering Support includes the rising '20-Day Moving Average', a line that has served as Support for every pull back since mid-August.

If that line of Support were to fail, it would suggest that the QQQQ may be prepared to deliver more than just a superficial pull back this time around.

 

[Mr_Nasdaq]

QQQQ - Monday's 5-Minute Chart ...

The QQQQ dipped in early trade on Monday to test Support at Friday's Low. Support was found and the QQQQ, which remains reluctant to pull back to any great degree, rose to a subsequent high of $42.65.

Monday's 5-Minute Chart shows the Q's continuing fascination with the $42.60 vicinity, which has served alternately as Resistance and then Support and which served as Resistance again on Monday.

On Tuesday, the QQQQ will trade based on the 10:00am 'Consumer Confidence Report' which is often, as we have witnessed in the past, a market-mover.

An area of Gathering Support (Buy Alert) lies between $__.__ and $__.__ going into Tuesday's trade.

An area of Gathering Resistance (Sell Alert) lies between $__.__ and $__.__

 

[Mr_Nasdaq]

QQQQ - Wednesday's 5-Minute Chart ...

The most important observation that can be made regarding Wednesday's pull back is that the QQQQ closed below Support at its rising '20-Day Moving Average' for the first time since mid-August.

Wednesday's 5-Minute Chart below shows that the force of the pull back was such that an inititial area of Gathering Support failed; and that the QQQQ was forced, therefore, to rely on a second area of Gathering Support between $41.79 and $41.82 from which it bounced modestly into the close.

On Thursday, what the QQQQ does in relation to its '20-Day Moving Average' will have the undivided attention of the market.

If the QQQQ proves unable to recapture and hold that line, then a deeper pull back may, at long last, be in store.

An area of Gathering Support (Buy Alert) lies between $__.__ and $__.__ going into Thursday's trade.

An area of Gathering Resistance (Sell Alert) lies between $__.__ and $__.__

 

[Mr_Nasdaq]

QLD and SMH - Friday's 5-Minute Charts ...

It's better to buy at Support than at Resistance:

Traders who correctly identified areas of Gathering Support (Buy Alerts) for QLD and SMH going into Friday's trade reaped the following results:

 

[Mr_Nasdaq]

QQQQ - Monday's 5-Minute Chart ...

The wily QQQQ opened strong on Monday and then shot higher. Only Monday's area of Gathering Resistance was able to stop it. Even then, there was no subsequent pull back from Gathering Resistance.

Monday's 5-Minute Chart (below) shows the morning spike to Gathering Resistance and how the QQQQ spent most of the day splashing within its narrow boundaries, temporarily peeking above the upper boundary in the afternoon.

On Tuesday, the QQQQ will trade with one eye on U.S. election results.

 

[Mr_Nasdaq]

QQQQ - Tuesday's 5-Minute Chart ...

The QQQQ continued its 'bear trap' rally on Tuesday by printing a new recent high of $43.09.

Tuesday's 5-Minute Chart (below) shows the QQQQ slicing through Gathering Resistance in early trade. Slicing through Gathering Resistance without at least pausing to say, 'Howdy do?' is a no-no. Therefore, the QQQQ found itself pulling back in the afternoon in order to pay its proper respects.

On Wednesday, a continuation of the 'bear trap' rally would find the QQQQ testing Resistance at its 2006 High ($43.23).

Note: Each day's area of Gathering Resistance and Gathering Support is calculated the night before.

 

[Mr_Nasdaq]

YHOO - Wednesday's Buy and Sell Alerts...

Traders who correctly calculated YHOO's area of Gathering Support and Gathering Resistance on Tuesday evening bought and then sold at precisely the right times during Wednesday's trade:

1) Gathering Support (Buy Alert) between $26.34 and $26.18.

2) Gathering Resistance (Sell Alert) between $27.17 and $27.22

Note: Each day's area of Gathering Support and Gathering Resistance is calculated the night before.

 

[Mr_Nasdaq]

Definition of a 'Bear Trap'

A bear trap begins with a Triple-Bottom Breakdown that encourages traders to establish short positions in anticipation of further downside. The Triple-Bottom Breakdown, however, is then followed by a sharp rally (like the one that began on Monday) that traps the bearish traders in their short positions.

The following Point & Figure Chart of the Nasdaq Composite Index displays a classic bear trap formation. The arrow on the chart points to the Triple-Bottom Breakdown that occurred last Friday. The rising column of Xs that immediately follows represents the sharp rally of Monday (Tuesday through Thursday's continuation of the rally, not shown here, stacks even more Xs).

To learn more about Point & Figure Charts, the following web site provides an interactive online turtorial that is excellent and free: http://www.dorseywright.com