The markets have dropped drastically over the past several weeks and for a while it seemed like they would never stop dropping. For now, maybe they have. I believe that in all likelihood a rally probably started yesterday. However, if the market has started to move higher, it may be short lived. If you missed out on entering short opportunities when the sell-off started, you may want to look to rallies for a 2nd chance. One stock worth watching would be GSM (Globe Specialty Metals, Inc).
Globe Specialty Metals, Inc. is a producer of silicon metal and silicon-based alloys. The company operates in six segments: Globe Metallurgical, Inc. (GMI), Globe Metais Industria e Comercio S.A. (Globe Metais), Globe Metales S.A. (Globe Metales), Solsil Inc. (Solsil), Corporate and Other. On April 1, 2010, the Company purchased all of the ownership interests in Core Metals Group Holdings LLC (Core Metals).
Please take a look at the 1-year chart of GSM (Globe Specialty Metals, Inc) below with my added notations:
GSM had formed a major support level at $20 (red) over the course of this year. Unfortunately, GSM broke that $20 level earlier this week and the stock moved lower as expected. When the market does finally rally, GSM could make its way back up to the $20 level. The $20 level was important when GSM was above it and it should be just as important now that GSM is below it.
On any moves lower, it is worth noting that GSM had previous levels at $18 and $16 (green) as well. These levels could provide future entry points for trades if GSM retests those levels.
The Tale of the Tape: After holding $20 as support for the past 6 months, GSM broke down through that $20 level. When GSM finally moves higher, the $20 level should act as resistance if the stock gets there. From there, GSM should move lower again, thus a trader would might want to enter a short position with a stop above $20. A break back above $20 would negate the forecast for a move lower.
Side note: If GSM were to pull back down to $18 or $16, a short-term long trade could be entered in preparation for a move back up to the $20 resistance.
Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. 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.
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