The market has been in a bullish trend lately, continually setting all-time highs. Until some major support levels, like the 50-day moving averages on the three major indexes, traders should be careful hunting for bearish directional trades. Below we will look at a couple of trade ideas that came up in my daily group coaching class recently and my thoughts on why I am fanatical (some might say) about resistance.

Resistance

Resistance is a level that an underlying has trouble moving above. It can be horizontal, at an angle, a recent high or low or a moving average, just to name a few potential resistance levels. I always like to say that with resistance, and support for that matter, there’s about a 70% to 80% chance that the underlying will not move through that level initially. I’ll follow that up with some “see for yourself” examples.

Two Recent Examples

In class someone asked me to look at Walt Disney Co. (DIS) for a potential move higher. I brought up the daily chart as seen below.

I pointed out that at the time, with DIS trading around $183.50, it might run into some potential resistance right around or just over the $185 level. If you take a bullish trade, I reasoned, be sure to move your mental stop losses up if it rallied up to that level because it has a better chance of retreating. The other trade to consider is wait until resistance is broken at $185 before taking a bullish trade. Sure enough the next day the stock rallied up and dropped below the $182 level.

Another stock we talked about in class was Tesla Inc. (TSLA). The stock recently broke through some resistance and moved higher before trading sideways for a couple of days. Below is an hourly chart on TSLA for several days.

I mentioned I would like to see the stock break some potential resistance around the $740 level before initializing a bullish trade, knowing that resistance had a better chance of holding the stock back. It was tested a few times in a several-day period and buyers refused to push the stock higher. I said I would rather play the odds until buyers pushed it through that level.

Not Guaranteed

Counting on resistance and support to work every time is not prudent. But knowing as a trader the odds are on your side it will initially hold should give a technical trader an advantage. When the odds of resistance being broken come to fruition, that is a time to be on the buyer’s side.

John Kmiecik, Market Taker Mentoring