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.
One 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.
The trading opportunity that I’d like to review today is that of EBAY (eBay, Inc). Before discussing, please review the 1 yr. chart of EBAY that I have outlined below, with my added notations:
EBAY has created a common reversal pattern known as a Double Top. This type of price action typically occurs after an up trend and signals a potential reversal. Confirmation of this pattern, and the sign that the trend reversal should have started, would be a break of support. In the case of EBAY, the support for the Double Top pattern is $30. As you can see, EBAY has broken that support, thus should be moving lower.
Another piece of information that can be garnered from price patterns is their price projections. Simply take the height of the overall pattern from the support to the top of the “tops”, in this case $5 ($35 top – $30 support), and subtract that amount from the breakdown point of $30. This gives you a minimum price target of $25. Obviously, this isn’t a guaranteed forecast, but it does commonly materialize.
The Tale of the Tape: EBAY is a stock that has recently broken support and confirmed its Double Top formation. Because of this, EBAY should fall to a minimum of $25. A higher risk short position could be entered now, or a lower risk short position entered on a rally back up to $30, if that occurs. 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