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Take a look at the 1-year chart of Red (NYSE: RHT) below with added notations:
RHT has been trading sideways from mid-February until the end of March. During that period of time, the stock formed a clear resistance level at $85 (green) and a level of support at $81 (blue). At some point the stock had to break one of the two levels created by the rectangle pattern, and last week the stock broke the resistance.
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The Tale of the Tape: RHT had a level of resistance at $85, and the stock broke that resistance. The ideal long opportunity would be on a pullback down to or near that $85 level. On the other hand, one would want to enter a short position on a break back below that level.
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
Follow me on Twitter: @cmtstockcoach