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 deciding which side of the trade you believe gives you the highest probability trade. In other words, are you bullish or bearish on the market? If you haven’t thought about that, review the market 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.
The trading opportunity that I’d like to review today is that of LZB (La-Z-Boy). Before discussing, please review the 1 yr. chart of LZB that I have outlined below:
If you have read my previous Chart School newsletters, you may already know that I believe the simplest tends to be the best. In my experience with other traders and students I have coached to trade, the ones that keep it the simplest always seem to do better than the ones who may overcomplicate things a bit.
This simplicity is on full display when you look at the chart of LZB above. From January until June, $9 was holding as LZB’s key level of support. After breaking below $9 in June, LZB fell almost 30%. This is why shorting a stock on a break of support can be quite profitable.
Since June, $9 has now become quite a strong resistance level. Have you heard the saying; “Old resistance tends to become a new support, and vice versa”? Well, LZB is a perfect example of that saying. So, now that $9 has become such a strong resistance, wouldn’t a break above $9 be a great buying opportunity? Wouldn’t you expect LZB to run higher on a break of resistance, just like it dropped lower on a break of the $9 support? And couldn’t you also enter LZB if it pulled back to $9 expecting it to now act as support again?
The Tale of the Tape: LZB has a key level at $9. After breaking $9 as support, LZB fell drastically lower. So, now that the old $9 support has become a new $9 resistance, the breakout through $9 provides a nice entry for a long position. If you’d like a better entry, you could also wait to see if LZB pulls back to $9 as support again. Either way, a stop placed below $9 would be recommended.
The only concern on LZB is that there was no increase in volume on the breakout through the $9 resistance. This doesn’t mean LZB won’t run higher, but a volume increase would have been a nice confirmation of the breakout.
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