Favorite Set Up - Testing Prior Resistance
Plus, a trade idea based on this set up with upside options for SQ.
When a stock hits resistance and rejects, the level must be respected the next time it is visited. Assuming it will be broken on the very next attempt often leads to a broken trade.
Eventually these levels do give way for a push higher but catching the trade just before the breakout is very difficult to do.
You can try to time entries this way, but I would not recommend it.
Instead, upgraded subscribers have heard me repeatedly describe trade ideas I’m considering with the optimal entry being on the retest of the level that was prior resistance.
There are a couple of reasons for this.
First, trying to jump in early is often met with rejection as mentioned but also trying to jump in immediately after the breakout can also turn into disaster quickly.
The fake breakout has left many traders that jump on late in a world of pain. This is obviously something we want to avoid.
To put the odds in your favor, wait for the pullback to find support at the level that was previously resistance. This support signals shares are likely just pausing before continuing higher.
And that is what we are seeing with SQ.
You might also notice the classic cup and handle pattern that formed. Another potential bullish set up.
After rejecting at the $80 price level in July 2023, SQ sold off in a meaningful way which brought shares down to under $40. A more than 50% drop.
It took five months to get back to the $80 level only to find rejection yet again.
On the second pull back, shares did not drop nearly as far and quickly recovered to retest $80 again and this time SQ broke through.
We could have seen SQ keep running but instead we are gettng a retest near $80, which sets up for a very clean bullish trade.
Setting a stop loss is also easier when you’ve bounced off of support. You really don’t want to see support broken which means setting your stop slightly below makes a lot of sense.
I hope this helps highlight why I enjoy trading this set up.
I am considering getting into calls for a near term trade.
Here are all of the details.
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