In my daily trading I generally watch how a stock trades versus expected support/resistance areas as I am deciding when/where to enter a stock long or short. If you hawk a stock closely enough, it is surprising how these actions repeat themselves ….
Generally, when a stock pushes through a resistance area (such as a prior day's HOD, or a pivot price) one of 5 things will happen:
1. Price will push through and not look back (generally happens early in the trading day) This is RARE;
2. Price will push through and immediately fail by moving back below the resistance area and quickly move lower without finding support. This again generally happens early in the trading day – usually in the first 1/2 hour. This is even MORE RARE;
3. Price will push through and then pull back to around the resistance area and chop sideways for several candles before re-accelerating higher;
4. Price will be rejected and quickly move back below the resistance area … price will then find support and then retest the resistance area. Price will move above the resistance area, not re-break lower (on a closing candle basis), and then accelerate higher. This is the MOST COMMON; and,
5. Price will be rejected and quickly move back below the resistance area … price will then find support and then retest the resistance area. After retesting this area (can be quick or a long test), price moves lower. Generally, when the retest is short, price will move very quickly/strongly away from the resistance area. The longer the retest takes the more likely price will find support as it pulls away from the resistance area.
Note that tests that occur early in a trading day often are more powerful and happen more quickly.
I will use AEM as an example for several of these alternatives. As you know I use a 5-min chart to intra-day trade and I augment that with my 1-min chart to confirm entries and exists.
Resistance Test #1 – Alternative#4:
As seen on the 1-min chart, AEM pushed off the open today at $72.90 and broke above the HOD from yesterday.
When price pushed back below yesterday's HOD notice how the next few candles bounced right off of the prior day's closing price and put in large lower legs. As well, the momentum indicator shown put in a nice 3-Push Pattern. These are your signs to expect a successful retest of the resistance area soon.
Aggressive accounts could get long before the break of the resistance area, while conservative accounts may want to wait for the 2nd test to actually show that it will succede before they get long.
Resistance Test #2 – Alternative#5:
On this 1-minute chart we see AEM move up to test the pivot price of $73.67 (green dash line) … the first test failed and price moved back in an ABC pattern before reversing back up to the pivot price once again (note the divergence with lower momentum on this push to retest).
This time you actually had one 1-minute candle close above the pivot price before this price was again rejected. Price moved into the next obvious area of support – the gold line is the equivalent of the 20EMA on the 5-min chart. Momentum made a new larger low and that should have warned you to expect a new low price after the bounce off of this support area.
Price actually bounced all the way back up to the pivot price for a third test … note how the attempt to cross was even weaker this time. Momentum was making a lower high once again and rolling over as price hung around the resistance area … a great spot for a short. Aggressive accounts would try and short as close to the pivot price as possible while conservative accounts would wait for the break of the $73.48 low of that 10:53am candle.
So price moved lower into a lower support area (the flip side to moving into a higher resistance area). So what happened … price tested the HOD from yesterday and broke through that level but quickly bounced off of the moving average equivalent to the 50EMA on the 5-min chart.
Even though the break through test failed, we can see momentum still made a newer lower low implying that we should expect a lower price after a bounce higher.
Resistance Test #3 – Alternative#4:
Now on this example of our Fourth Alternative, we are testing support instead of resistance. The first break of the support line failed and price bounced in a weak looking bear-flag consolidation pattern. Notice how MACD grinded back to around the zero level while price moved virtually sideways … your Spidey senses should have been tingling.
Price moved lower and made a 2nd test of support … this time price accepted the lower area and started to close below the support line. Support now becomes resistance and price fails to close back above the previous day's HOD as it slowly starts to drift lower.
Resistance Test #4 – Alternative#3:
The last example from the action in AEM on Friday was Alternative #3, except in reverse since we are testing support and not resistance. I've shown here a 3-min chart so we can see all the consolidation activity at the end of the day. Notice how price spent most of the last part of the day below the pivot price. It will be interesting to see what happens Monday morning first thing.
This blog post is long enough so I will post examples of Alternative #1 and #2 at another time.
Cheers … Leaf_West
