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
, 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.
What you're waiting for to trigger the trade is a test of what is now a swing point. Here's the same chart (from Oct. 5 forward), shown from a swing point perspective.
In this chart, the key point is that prices have exceeded the high of the gap down bar's high and have closed under those highs. Although that by itself is enough to pull the trigger, a patient trader will wait until the next day's trade to see that any further attempt to move higher fails. As we see on the chart, prices did move higher Monday but again failed and that failure was picture perfect. Volume shrank as buyers stepped away from the table.
Without a large short interest to fuel any further move higher, the only buyers now are new buyers. Given what this chart is showing us, on a short-term time frame the odds of those buyers being sufficiently large enough to overpower all the trapped sellers seems highly unlikely. The more likely scenario is that as prices begin to drip lower again those anxious sellers will start to bail and accept their fate. That should push TQNT back to the $5 level for a retest of that initial low. This scenario should play out rather soon as well and it is a trade at which you can literally give it no room on the upside stop loss order. That's what makes the trade so attractive -- your payoff is likely about five times as great as your risk.
So, until next time, keep trading the charts!
At the time of publication, Little held short positions in TriQuint.
L.A. Little is an author, professional trader and money manager who writes daily on
, a free educational site for traders and investors. He has been featured in Stocks & Commodities magazine and is the author of