Traders Face a Crossroads

There wasn't much of a surprise in terms of what would be happening with regards to interest rate policy on Tuesday, so now it's on to the next worry in the market.

The Nasdaq 100 (NDX) has continued to operate in a range between 1700 and 1720 since the gap up over 1700 on Friday of last week. The base that is forming on the intraday time frame would suggest that there is a continuation signal ahead. However, we've seen over the past week that base formations have not been doing what they typically should do. Further, moving out fractally, the intraday base at highs is running into the resistance of the possible daily head-shoulders pattern that I talked about Tuesday.

The obvious question for traders becomes whether to go long on the intraday base, or short given the daily head-shoulders pattern.

The answer to that question begins with which side of the market you like the most. If you are long-oriented and looking more for a move into the former resistance at 1734, the obvious entry is closer to 1700 with a stop on the break of that level. Tuesday offered this entry twice so if you missed it, don't chase it.

If you are short oriented on the NDX, the strategy would be to enter closer to 1720, looking for the test of support and a break of 1700. The stop would then be placed above that current resistance, and the profit target would be closer to 1690.

I hesitate at this point to offer a bias because what I was looking at last week should have lead to the breakdown and move into 1635. Instead, the uptrend line held support and the bulls created the "U" reversal. This says to me that base formations right now are formations that offer high win-loss rates. It all boils down to risk management in this case. Enter closer to the resistance or support point and your risk is much less if the market doesn't go the way you expect. If you enter farther from best entry points, risk is increased and profit potential is decreased proportionately.

Anecdotally, since the current intraday base formation should go higher, I'll be looking for Wednesday to create a move under 1700 that can fill the gap to 1690. Should 1725 break on Wednesday, this pseudo-bias will be invalidated and 1734 would then be the higher probability level. If I were pinned down to create a bias, I would be looking to enter near resistance and see if the support level can't break down and create a move to 1690. If 1725 broke, I would take my medicine.

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Chris Schumacher is a financial trader, speaker, writer and co-author of Techniques of Tape Reading. He has delivered seminars throughout the U.S. and is a featured speaker at trading expos. At the time of publication, Schumacher had no position in any securities mentioned in this column, although holdings can change at any time. He is a graduate of Ohio State University and has served as a guest lecturer at Ohio State University's Fisher College of Business as well as the Center for Entrepreneurship. While Schumacher cannot offer specific investment or trading advice, he appreciates your feedback; click here to send him an email.