From time to time, I 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 to decide which side of the trade you believe gives you the highest probability of success. 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 LTD (Limited Brands). Before discussing, please review the 1 yr. chart of LTD that I have outlined below, with my added notations:
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 LTD above. LTD has formed a very clear trend line of support (blue), as well as a nicely defined trend line of resistance (red). As you can see, the trend lines are converging on one another. At some point, doesn’t LTD have to break either through resistance or below support?
The Tale of the Tape: LTD (Limited Brands) has formed trend line support and resistance over the last 6-9 months. If LTD were to break above the down trending resistance on above average volume, entering a long position could be advised. If instead LTD were to break the up trending support level, a short position could also be advised. Now, could you also enter a long position if LTD approaches that same trend line support? Yes, just like you could enter a short position if LTD approaches the trend line resistance. However, the breakout trades tend to be more desirable.
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