From time to time I like to give readers a heads up on potential trading opportunities. Before considering any trades outlined in this newsletter, always remember that you must decide for yourself if you personally 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 RAX (Rackspace Hosting, Inc). Before discussing, please review the 1 yr. chart of RAX that I have outlined below, with my added notations:
RAX has formed two important levels over the last year. The first is the 9-month up trend line support (navy). The second would be the level of $40 (red), which has taken shape over the last 5 months. Although a break of the up trend line does not by default mean RAX would be starting a downtrend, a break of the $40 level should confirm the start of a downtrend. As you can see, RAX has broken BOTH supports, thus should be moving lower.
The Tale of the Tape: RAX has recently broken (2) very important support levels. Because of this, RAX should continue lower as it begins the initial stages of a downtrend. A higher risk short position could be entered now, or a lower risk short position entered on a rally back up to the $40 level, if that occurs. Either way, a stop above $40 would be advised.
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