How To Short At Resistance

At Simpler Stocks, I am always talking about scanning for bearish stocks when the overall market looks toppy, and looking for bullish ideas when conditions are favorable for a rally. Right now I am really concerned about the overall market. Why? Here a few charts that concern me.

For one, the NASDAQ-100 (NDX) has been trending below its 200 SMA (simpler moving average) on a daily basis. On the other hand, the S&P 500 Index (SPX) has been stubbornly holding above that line. That divergence concerns me, as usually these 2 indexes eventually snap back in line.

How To Short At Resistance - $WHR snap back

Also, the SPX appears to forming a H&S top, which would project to levels around 2000. This also coincides with the daily Red MACD finally overbought, while the Blue MACD line is under zero.

How To Short At Resistance - $WHR w/ MACD

With these warning signs, I scanned for stocks with bearish chart patterns. One that came up was Whirlpool (WHR). WHR disappointed with earnings, and started consolidating at a lower level. A little overall SPX rally kept the stock from having another move lower, but the hangover from earnings kept it from mounting any meaningful rally. This presented itself on a chart as a bearish “ledge”. The more times a horizontal line can be drawn, the more significant. As seen, a horizontal line touched the price MANY times.

How To Short At Resistance - $WHR ledge

The theory is that if the SPX rallies, WHR will have a muted rally. If the SPX starts to sell off, WHR will likely break the ledge. Sure enough, on Wednesday, the SPX sold off sharply and WHR began to break the ledge. Many people asked me near the close if it was the right time to short. I mentioned that it was beginning to get oversold, and the ideal scenario was if it had a quick snap-back rally to the break down point. Here is the stock on the close on Wednesday.

How To Short At Resistance - $WHR support to resistance

Luckily, On Thursday morning, the /ES’s opened sharply higher. The prior support at 174 became resistance. WHR rallied right back up to that resistance, and on the Simpler Stocks live chat, I actually shorted the stock around the 174 level. This trade was good for more than 3 points!

How To Short At Resistance - $WHR 3 points

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Chris Brecher

Chris Brecher Stock Vice President

Chris Brecher grew up in Jacksonville, Florida. Though he went to college for Paleontology and Marketing, he settled for being a Stock Broker. In watching the brokers in his office lose every time by taking shots in options, Chris wanted to find out who was making money on the other side.