TriQuint Charts: Attractive Short Trade

By L.A. Little of tatoday.com, author of Trade Like the Little Guy.

A trader can find opportunity on many time frames, in many stocks. Let's take a look at a short-term time frame trade -- a short on Triquint Semiconductor (TQNT), a company that offers modules and components for communications applications.

To be clear, this is a short-term swing trade and is focused on a quick, short-term opportunity that either happens immediately or is to be forgotten. The point of the article is to illuminate how swing point analysis works for a short-term trading opportunity just as well as all other trading time frames.

The huge gap down occurred on the release of earnings. When a stock gaps lower and volume expands tremendously, it takes some time for prices to recover. The pattern seen on the chart is rather typical of what occurs in such a situation. The stock eventually reaches some support low at which point the stock begins to weakly and meekly bounce higher. All the while, the high of the high-volume gap down day remains untested.

After some period of time, prices almost always will make their way back up to that area. If it takes weeks (which is what has occurred here), that gap down area becomes serious resistance. Most technicians won't go into details about why the chart patterns play out over and over again such as the one I described. If you consider that charts simply reflect human reactions to success and failure then it becomes clearer.

In this particular situation, those who are underwater on this trade have moved on from the denial to the acceptance phase of their grief. They have accepted that they are going to lose money on this trade. All they can do now is to get as much back as they can. So when prices move up to what we have labeled "resistance," those underwater become willing sellers of stock at those levels.

As an astute trader, you recognize and conceptualize what is likely to happen and you lay in wait for the opportunity to short at that area. You do so because you recognize that there are likely many willing sellers at that price level who will now end up supporting your short position.