I first typed this up yesterday and accidently published it as a private idea. Here's the second attempt:
I rarely trade tickers with overhead resistance. The idea is to buy when the trend is clearly up and there's no overhead supply to dampen upward prices. Buy high and sell higher as it were. However, during selloffs, bear markets, etc, there is going to be great opportunities to buy stocks coming off their lows and reversing their down trends. One such ticker is XBI. This chart is the monthly candle chart. On first glance we see a chart that rallied for quite some time and then sold off hard from peak to trough. However, there's some strong indicators here that this is a lasting bottom with a strong upside possibility. The May and June monthly candles not only tagged the long established support area but represented the most selling volume ever for the ETF in May (potentially clearing out a large amount of bag holders) which was followed up by the most buying volume ever for the ETF in June (Potentially the "smart" money getting involved). This formed a tweezers look with the two monthly candles. Moreover, while support held during these two volatile months, RSI signified that the ETF was the most oversold it had ever been in it its history. Confirming the RSI was the fact that both the May and June candles were outside the lower Bollinger band signifying the ETF was incredibly cheap.
Monthly Bollinger Bands:
The weekly chart confirmed what the monthly chart was showing. XBI traded down from January through May all the while RSI was bottoming. The May 9th weekly candle and the June 13th weekly candle wicks both put in bottoms confirming the monthly chart. The ETF then cleared the first level of resistance on strong volume at the $72.58 area signifying a possible change in trend. One caveat, a possible weak spot is the weekly RSI has still not broken out to the positive range yet. However, it is pointing up. The weekly candle is now above the median of the Bollinger band . IMO the weekly chart is bullish.
Weekly Chart:
Weekly Bollinger Bands:
The daily chart looks absolutely fantastic IMO. There is a double bottom look with coinciding positive divergence on the RSI from May to June. The first level of resistance was sliced through on June 23rd and retested with buying volume on the 29th and the 30th confirming former resistance as new support. The ticker has just recently broken through second level resistance at the $81.71 area all the while RSI has been expanding in to a bullish regime and taking out its previous high from November of 21'. The 20day/50day MA's just crossed and are starting to curl upwards. After a brief squeeze look on the Bollinger bands the ticker tested the lower band and then broke above the median line and is now walking up the upper band. Relative strength looks like it is in the early stages of overall out performance as well. We can see this on the daily relative line chart of XBI vs SPY. Lots of bullish signals.
On this daily chart I labeled the areas of possible support & resistance as levels. These are the areas I use for entry & exits. When trading stocks from below overhead supply it is reasonable to expect selling pressure as the stock moves into these levels. Patience is key. I take partial positions on penetrations of the resistance areas and then fill out the position upon retests confirming former resistance as support. Occasionally on strong up-moves you will not get a retest. In this instance I will fill my position upon the next penetration of an area of resistance or the next sell off. Whichever is first - it is not perfect but I am not looking for perfect. I am looking to develop a strong cost basis while building a long term position.
Daily Chart with Moving Averages:
Daily Bollinger Bands:
Obviously I have a bullish bias as I am long this ETF . How do I keep my bias in check? I respect the support/resistance levels. There's lots of overhead supply to contend with. I expect plenty of selling within the ranges of the support/resistance levels. A patient trader can scale in as these levels are taken out and set stop orders if the fail.
Any thoughts, feelings, and ideas are welcomed. Thanks for sharing. Good luck to all.
I think that by the time an asset gets above all resistance levels, the bull run will be in a later stage and you would have missed much of the early gains. For example, with XBI, there is a 100%+ gain to be made from its current price to its all-time high: the last point of overhead resistance.
I should also point out that all assets, no matter how strong the bull run, actually have overhead resistance, because there are always short-sellers waiting at Fibonacci extension levels.
Although there may be selling and consolidation before the price is able to break through various levels of overhead resistance, so long as the tailwinds are there, it's worth holding the asset, with your stop losses in place. If one is worried about opportunity costs, one can use a SPY comparative ratio analysis. For example, if the XBI/SPY ratio is oscillating down, one can sell XBI and buy SPY until the oscillator reverts back in the favor of XBI, and at that point one can sell SPY and buy XBI back right before the next breakout and burst of outperformance. Right now the XBI/SPY ratio is strongly in favor of XBI on the higher timeframes, so trying to sell XBI and hold SPY as XBI consolidates on the lower timeframes could risk XBI breaking out faster than expected while you're still holding SPY.
Finally, I will also say that one thing that confirms that it is safe to buy an asset with a lot of overhead resistance is by looking to see if there is a combination of three things: (1) support on a Fibonacci level, (2) outperformance of the broader index, (3) oscillators on higher timeframes fully cycled down and are ready to begin cycling back up. All of these occurred for XBI.
XBI actually bounced off of its Golden Ratio in May and then retested it and bounced off it again in June. This double bottom on the Golden Ratio is a significant confirmation that the asset has bottomed and is ready to break out.
Breakout_Charts
⋅
@spy_master, Valid points about overhead resistance being present even after clearing out to new ATH's. I think it's important to clarify the three types of overhead resistance that exists. IMO these types of market participants represent the tree types of over head supply from least impactful to most impactful.
1) Longs with gains looking to exit. 2) Shorts putting on positions. 3) Bagholders looking to exit.
Thoughts?
SpyMasterTrades
⋅
@Breakout_Charts, Great breakdown. I agree. The only thing I would say is that bagholders looking to exit should never be overhead resistance. One should never enter before they have capitulated. You know when they're exiting because they're selling into strength and creating long upper wicks on the candles. Here's my entry analysis:
SpyMasterTrades
⋅
@spy_master, The presence of bullish Marubozu candlesticks means no bagholders that are looking to sell into strength are left.