Play Both Sides With a Bilateral Strategy

The iShares Russell-2000 Trust(IWM Quote) has been in a major downtrend for many months. It posted a multiyear low in November and then shot higher with the broad market. The recovery rally has evolved into a rising wedge pattern that could support a bilateral trade strategy over the holidays and into early 2009.

The rising highs of the wedge have pushed into resistance at the 50-day moving average. A breakout over that level will issue a buy signal for a rally that could reach as high as $60. Alternatively, a breakdown under the trendline created by the rising lows would support a renewed decline that tests the bear market low below $40.

Exxon Mobil eSignal

Bilateral setups force us to control our natural bias and let the market tell us which way to go. And, as it turns out, the best trade is often in the opposite direction from the crowd's expectations. In other words, the majority piles in one way, but the real profit will come from trading it in the other direction.

Exxon Mobil(XOM Quote) rallied off a two-year low in October, shooting back to resistance at $81 earlier this month. That price action carved out the final stages of an inverse head-and-shoulders breakout pattern that attracted a fair share of attention last week. The stock broke out on Wednesday but then turned tail and failed the breakout.

We can see a bilateral opportunity missed in the overly bullish analysis. The rising lows off the October bottom have generated a trendline that corresponds to the 50-day moving average. This line was broken on Friday and tested in Monday's session. A selloff under the low at $73.27 will confirm a sell signal for a decline into the low $60s.

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Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.

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Know What You Own: Farley mentions the iShares Russell 2000 Index ETF. This is based on an index that includes such small-cap stocks as Alexion Pharmaceuticals(ALXN Quote), Flowers Foods(FLO Quote), Foundry Networks(FDRY Quote), ITC Holdings(ITC Quote) and Myriad Genetics(MYGN Quote).