From time to time, I would like to give readers a heads up on potential trading opportunities. Before considering any trades that I might outline in Chart School, always remember that you must decide for yourself if you like the trade.
A key factor in making that decision will be coming up with which side of the trade you believe gives you the highest probability trade. In other words, do you like the short side of the market, or do you like the long side? You don’t necessarily have “know” what side to be on, but it certainly helps to take a stance. So, if you haven’t thought about it, review the overall indices themselves. Take a look at the S&P 500 for example. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.
One trading opportunity that I’d like to review today is that of CXO (Concho Resources). Before discussing, please review the 1 yr. chart of CXO that I have outlined below:
If you have read any of my previous Chart School newsletters, you will already know that I believe the simplest to be the best. In my experience with other traders and students that I have coached to trade, the ones that kept it the simplest always seemed to do better than others who may have overcomplicated things a bit.
This simplicity is on full display when you look at the chart of CXO above. CXO has formed a common price pattern called a Rising Wedge. This type of pattern tends to have bearish implications. A break below the up trending support level would confirm the pattern. The decrease in volume over the last 2 – 3 months is a common “calm before the storm” with patterns such as these.
The Tale of the Tape: CXO (Concho Resources) has formed a Rising Wedge price pattern over the last 4 – 5 months. Volume has also been drying up as the stock has continued higher. If CXO were to break above the up trending resistance on above average volume, entering a long position could be advised and the bearish implication of the pattern would be nullified. If instead CXO were to break the up trending support level, the pattern would be confirmed and a short position would be advisable. Could you enter a long position if CXO approaches that same support? The wedge pattern does not mean that CXO is definitely going to break lower, so yes, you could enter a long position when CXO approaches the up trending support.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!
Christian Tharp, CMT