By: Chris Rowe — July 17, 2012
Technical Tuesday - Where the Smartest Traders Will Sell Stock
If you focus on the key price levels that institutional traders focus on, you'll make profits the way institutional traders do. At least in percentage terms anyway.
Last week the title of my article was simple: "Be Bullish Here. Period.".
Costas Bocelli also sent out a bullish trade alert in his trading service Profit Skimmer. (I obviously can't reveal the details here on the exact structure of the trade.)
I think most savvy traders agree that it's time to have bullish positions in the stock market.
The question is... until when?
At some point the momentum must slow down. The early bird institutional traders will begin selling, and that will cause a bearish reversal in prices. By that time, "Joe retail trader" will realize that a new top has formed. He will be frustrated at the sight of the majority of his profits being wiped away.
At that point, he'll feel like he's faced with a potential lose-lose situation: He can hold on, only to see the small profit turn into a loss, or he can sell and lock in a small profit. But even with a small profit he'll still have that "loser" taste in his mouth.
How To Trade Like a Winner
Let's talk about how to find the best prices to buy stock and the best prices to sell stock.
There are plenty of trend lines in the chart, below, of the S&P 500 (some of which I won't talk about but were important enough for me to have on the chart). You can feel free to study them to figure out why they are important.
(By the way, if the charts are too small to clearly see what I'm talking about, you should be able to enlarge them a bit by clicking on them.)
Let's start with the purple lines that form an intermediate-term up channel.
Chances are, the S&P 500 will not stay exactly in line with the channel, but it will likely be very close.
Immediately, we can see that the stock market is trading near the lower end of the channel. This is one clue that, although prices are higher than they were in the first half of June, prices are probably low relative to where they will be in the near future, assuming the channel stays intact.
You'll notice I drew TWO lower channel lines (a.k.a. trend lines). One is thick and one is thin.
One connects the intraday low of June 4 with the intraday low of July 12.
The other connects the intraday low of June 5, June 25, June 26, June 28, and the closing low of July 12.
Many would feel it was only important to draw the thinner one, from the June 4 to July 12 intraday lows. But the second (thinner) one has proved significant too many times to ignore.
Everything I drew here is significant and can increase your odds of success in making profitable trades!
The upper channel line, a.k.a. the "return line", must be parallel with the lower channel lines, a.k.a. the "up trend lines". Why did I choose to line it up where I did (and not any higher or lower)?
Look carefully at the beginning of that upper channel line, over to the left where it's a bit thicker (so it's easier for you to study).
You'll see that it lines up nicely, first with the intraday high of the red candle on May 18 as well as the following 5 days -- either at the closing high or intraday high. We then extend it out and it moves nicely across the closing high and intraday high of June 19 and June 20, respectively.
Here is the same exact chart once again, for your convenience as you scroll...
Let's talk briefly about the horizontal blue line. It's a very significant level that actually goes back to the April/May 2011 high and the July 2011 high. But it also has significance as far back as the years 1999, 2000, 2001, 2007 and 2008. That makes it an enormously significant price level.
Once that horizontal blue line is penetrated -- an event that I think will soon take place based on what I said in last week's article -- there won't be any major resistance until we hit the thick black down trend line that starts with the April 2 high and connects to the May 1 high.
Of course, as the days pass, that down trend line gets lower and lower. But since we are so close to the purple up trend line, I think the stock market will soon make a sharp advance. In other words, I doubt the market trades sideways or slightly higher while we watch the black down trend line inch lower and lower. Instead, look for a sharp move higher, and it probably happens soon.
You'll notice two other thin black horizontal lines. I drew them because those price levels do have some significance, but are not nearly as important as the three lines we've just discussed (purple up trend line, blue horizontal line and thick black down trend line). I can't imagine the stock market breaking above that significant blue line and then failing at that much less significant thin black line.
When you zoom out, as seen below, what we are faced with is a potential triangle. Focus your attention ONLY on the purple up trend line and the black down trend line, as they are converging. A triangle is typically a continuation pattern that allows prices to first consolidate and then continue the trend of the next larger time frame.
From the October 2011 low to the April 2012 high we saw a huge up trend followed by three months of consolidation. I'm not ready to predict a long-term upside breakout yet. And of course there are bearish cases to be made about this market's long-term direction (which is how stock markets exist in the first place).
Nonetheless, the long-term triangle should be pointed out and followed. On a breakout, the resistance level to use will be the "return line" of the purple channel we have been studying.
But coming full circle to the intermediate-term trend and where support and resistance are found:
Right here, it seems, is a great place to take bullish positions. We are very close to the two purple up trend lines as well as a significant black horizontal price level and a red horizontal price level (that I didn't discuss but you can probably see for yourself why it's significant). There is significant support very close to today's price.
We have a confirmed intermediate-term up trend with higher highs and higher lows.
We are probably about to break through a very significant price level marked by the blue horizontal line.
We have a very good idea of where the stock market will likely run into resistance. Therefore, when we see prices nearing those levels we will know it's probably a good time to exit our bullish positions (or at least hedge them in case the market does decline).
The very significant level is the thick down trend line.
The somewhat significant level is the horizontal thin black line.
Either one you choose to respect should yield a nice advance in price before we find out if the market shows them the same respect in the form of a bearish reversal.
My bet is that the market either slices right through the thin horizontal line and runs up to the down trend line or at the thin line. The supply side will put up a small fight with the demand side before the demand side pushes prices above it and moves to the down trend line.
The down trend line, in my opinion, is where the early bird institutional investors will be selling stock to Joe retail trader a day or two before prices reverse and start declining again.
Where will you sell?