Terminology

Every week we get a request to forward an old newsletter that we wrote about terminology. The charts (and dates we refer to) are dated but the methodology is the one we've used for the last decade and most likely will use until we retire.

This is how we use basic support and resistance:

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Some of you wanted more clarification in how we use our terms.

a) Break-out (long through the break of resistance)
b) Support long (trade with the plan that support holds)
c) Break-down short (short through the break of support)
d) Resistance long (shorting the reversal of a stock against resistance)



Here is an alert from a few weeks ago, WYNN 70 long which was a break-out long through daily resistance: 70 was previous resistance but we believed that it would go through this time -- a successful break-out through 70 resistance



A support long -- we believed that support would hold (and not crater) due to AKS being over-sold (extended from any base on daily).



AKS 20 is a potential support short (your traditional break-down short with the belief that support will crater). If volume is good we would short 20 and hopefully cover on the 200 SMA near 19. Why not buy 20? Because of the base.



GS today was a resistance short -- that is instead of breaking out of resistance to be a successful break-out long we believed last night that it instead would reverse at resistance.




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Intraday set-ups:

Base and break can be either short or long -- it simply means a basing over the alert for shorts, or under the alerts for long. Base and breaks are used for break-out longs (through resistance) and break-down shorts (through support). Here is a base and break of the QQQQ short from the daily spot 44:


Daily spot was 44 -- bases right above and goes through for what would have been a very successful short through 44 support.




Extended from EMA is the opposite of base and break and is used for support longs and resistance shorts.

GS resistance short alert from last night at 160 a good example -- GS approached 160 extended from base and thus was ripe for a reversal short trade against resistance.



Another example of extended from base resistance short on our ANR trade today:

Base was near 43.2 -- note how extended it was by the time it hit daily resistance at 44. The short was a lay-up.



Here is an example of a support buy long from MET today as stock reversed up after hitting the 200 SMA



Text-book set-up for support long as the stock hit daily support in an extended fashion -- base was 34.8, stock went down at a steep angle, hit support on daily, and bounced.




Most trading strategies are based on some type of Support and Resistance -- our niche is to combine daily support/resistance with intraday strategies (base and break/ extended away from base).



For break-out longs/break-down shorts use base and break
For support longs/resistance shorts use extended away from base
Note how the two are the exact inverse of each other.

As to whether day-trade or swing these trades the formula is simple: if you're going contra-trend (stock extended hitting resistance but in strong trend) then only day-trade. If you're going with the trend (break-out on high-volume in direction of trend) then swing.


Hopefully this helps clarify the matter.


HCPG

Protect Mode

We posted yesterday before the close that we were going down our alert list and buying everything within 1%. It worked well as several of the stocks gapped over (including our favorites VALE FCX).

However we believe now that this will be it for break-outs for at least a few days. We sold a lot into this ramp and now have stops over entry for remainder of positions.

Market Talk

Very bullish day for the market as we saw rotation into the commodity stocks as leader sectors like financials took a breather.

Let's look at a few charts we always keep on our screens:

AAPL is probably the most symbolic market leader and the stock keeps melting higher.



As we posted a few times today GS made a perfect bounce on the 20SMA as the bulls defended the spot with vigor. Watch today's low as a tell for market sentiment. If GS breaks through today's lows with volume then we would probably go back to a more conservative stance.



Copper often is a great tell and today it made a very nice bullish move.




So far everything looks good to go for higher prices. If the market wants to roll over for a prolonged correction then most likely the three charts we mentioned will lead the way. We'll stay on the bullish side for as long as these three are healthy.