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 STI (Suntrust Banks, Inc.). Before discussing, please review the 1 yr. chart of STI that I have outlined below, with my added notations:
STI has formed a common price pattern known as a Head & Shoulders (blue) pattern. This pattern is primarily considered a reversal pattern, meaning that after STI’s multi-year uptrend, the stock may be ready to turn lower. The key to this pattern would be confirmation, which would be a break of the $27.50 neckline (red). You can see that not only is $27.50 a key area of support, but it was also a very important resistance level prior to the end of December 2010. A break below $27.50 would confirm the pattern and signal lower prices are likely ahead for STI.
The Tale of the Tape: STI (Suntrust Banks, Inc.) has formed a common H&S reversal pattern. A break below the $27.50 neckline (support) would be an ideal entry for a short position.
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