How to Trade During Market Selloffs and the Power of Support

The one key element for traders looking to "buy the dip" is support. Support levels are powerful because this is the level where we see buying interest due to previous buying, trend lines or moving averages.

Even during market selloffs where the drop seems to have no floor, support can have a powerful impact. Let's study these momentum stocks during the current selloff. Notice that all of these bounced at previous lows or key moving averages. 

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Remember, we are always trying to make the complex simple, and nothing is simpler than buying at support levels.

SPY bounces off October '14 low

GOOGL bounces off pre-earnings breakout gap level

CMG bounces off 200 dma

UA bounces off 200 dma

These charts are great examples of the power of support and how to trade during market selloffs.

Next week I will present a webinar on swing trading and handling market selloffs. Keep your eyes peeled for info from www.bullsonwallstreet.com

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Key SPY Support Level

SPY is nearing converging support levels and oversold stochastic levels. A low risk opportunity may present itself near the 50 day moving average.

Take note that the volume pattern is showing distribution.

SPY Chart Analysis

I posted the SPY chart that I sent to subscribers last night without any annotations and a few blog readers weren't quite sure what the chart meant.

The key is the two line drawn and support and resistance. If SPY gets close to the top line (around $93-95), that sets up a great short entry. The market will go from overbought to extremely overbought, the moving average comes into play along with price resistance. Obviously this is the move I am hoping for.

If we don't get more bounce, but rather a pullback, long entries can be made near the support line.

At this moment, I am only managing positions. I dont' see good entries, especially long entries.

2 Low Risk Real Estate Short Entries

If looking to get short on the current or future bounce, SRS offers two low risk and easily managed entries.

The leveraged real estate ETF is currently right at moving average support. An entry here with a tight stop under the moving average provides low risk If the top is placed at $64 and the target is modestly placed at $75, that would give us a 5:1 reward to risk ratio.

If the market gives us a stronger bounce, the next logical entry level would be at $50, where there is strong price support.

GLD Entry and Trade Report

In the Monday morning edition of the Trade Report, I mentioned that I was bullish on the gold sector and was waiting for a pullback. A few readers wanted to know at what levels I would consider entering.

Let's take a look at the GLD chart. When looking for support and resistance levels, I want them to jump out at me. The first thing that jumps out at me is the two failed attempts to really past $94, followed by the current gap up over that level. This is where I define the new support level. If we get a nice orderly pullback into the $94-95 range, I will enter. However, if the pullback is on a large bar and many of the gold related stocks are declining on heavy volume, I will skip the trade.



Trade Report:

In the free Wednesday edition of the Trade Report, I discuss:

My QLD entry, this crazy market and relative strength

A few recent positions, X, ILMN and JOYG

Bearish engulfing and flag setups

The Weekly Watchlist

Diversification by way of setups.

Tuesday Report

Monday Report

The Power of Strong Support

I outlined my entry in APA on Friday. Today the stock is up over 3 points on a negative day for the market (as of noon eastern time). This is a good example of the power of strong support.

Today's Trade: EWZ

I bought 200 shares of EWZ, the Brazil ETF, at $91.61.

Setup: Bullish Flag post Breakout-Breakout Pullback. The stock pulled back to the top of the breakout level, which is also where it broke resistance. Recent volume pattern is strong and obv has increased as stock has pulled back from breakout. As a plus, all things Brazil have been on fire.

Risk: My initial target is the old high around $95. I will either take full or partial profits at this level. If I feel the stock is ready to breakout to another new high, I'll keep a position. My stop is just under price support and the 20 day moving average, in the $88-89 range. This only gives me an intial risk of about 1:1 reward to risk, but I feel the probability of the setup is strong. Also note this is the "initial risk". If I decide to stay in for a breakout of $95, my target will be higher.

Concerns: Stochastic not yet oversold, but still is under 50. U.S market could pull down strong region like Brazil. Still, Brazil has great relative strenght compared to S&P 500.

6 Stock to Buy on a Dip

The market is now in extremely overbought territory, which is why I actually deployed a short today (DHI- a housing stock at the top of it's downward trend channel). It's seems like ages since I've shorted a stock, and believe it or not, I love shorting!

Along with my primary long watchlist, which consists of weaker support levels that are close to current price, I'm making a list of stocks to buy on deeper dips to stronger support levels.

Six stocks on this list (with entry points) include VDSI (36), CPLA (57), VIP (26), PCU (115), AAPL (150) and BRCM (37).

Trades: AAPL and NOV

I sold 150 shares of AAPL at $125.84 (entry at $121.75) for a $613.50 gain (+3.3%). I noted the exit in the comments section of my last post.

At the close, I sold 200 shares of NOV at $116.11 (entry at $109.64) for a $1294 gain (+6.0%).

Both trades were pullback plays off of extreme weakness. While buying on this type of weakness can be risky, I felt they were low risk, high reward trades. When I bought the stocks, they had fallen right into very strong support areas. If you look at the charts below, you will see that price could not help but to bounce.

Note that these were extremely short term plays. AAPL actually looks like a good short candidate for my normal swing trading style, and is on my primary short watchlist. However, it was obvious the stock was a good long day trade, due to the support level.



NOV is still a good long candidate, as long as the 50 day moving average holds and OBV remains strong.

Trades: MS, AAPL, NOV and CROX

I covered my entire 800 share MS short, half yesterday at $63.05 and half today at my target, $60.10 (average entry price was $65.89). That comes out to a $3455 gain (+6.4%).

I have not unloaded CROX yet, despite currenly being about 5 points down (-$2000). I've decided to use a very loose stop, just under the 50 day moving average. The potential loss is bigger than originally calculated, making for a crummy reward to risk ratio. I rarely make this kind of move, but there is strong support at the new stop level.

I bought 150 shares of AAPL at $121.75. Technically, the stock looks broken. However, take a look at the price by volume bars on the chart. There is a lot of support here, so I expect a bounce.



I bought 200 shares of NOV at $109.64. The stock i still holding at the moving average, and again there is a lot of support at this level.

ZUMZ Bullish Englulfing Pattern, Steel, Energy and the UFC

I entered ZUMZ yesterday on a pullback to support, and today it looks as though we have confirmation that the stock is going to bounce. ZUMZ printed a bullish engulfing pattern where three areas of support converged (the 50 day moving average, price and gap support). I could not have hoped for anything better.

Conservative traders would argue that yesterday's entry was risky. The safe way to have played ZUMZ would have been to place the stock on your watchlist as it moved to support, and entered only after they type of bullish confirmation signal we received today.


Steel and Energy stocks are high priorities on my watchlist. The two sectors are finally pulling back, albeit after parabolic moves up. STLD, RIO, PDE, VLO, HOC, MT, XTO and DNR are a few of my favorites right now. I've also added two new stocks to the breakout-pullback watchlist.

Off-Topic:
As many of you already know, I am a huge UFC and boxing fan. Saturday night, UFC is showing a good match-up free on SpikeTV. Mirko Cro-Cop against Gabriel Gonzaga. Mirko is known to unleash some of the most lethal kicks in mixed martial arts. Check out the teaser:

Anatomy of a Possible Breakout Chart: EWZ

Based on the annotations to this chart of EWZ, I would be a buyer on a high volume break of $50, or a low volume pullback to $$47. The key to this chart is not only the support and resistance levels, but the pickup in volume. This indicates institutional interest. The stock has moved to the old highs on higher volume than the original ascent.

Chart: HAL

HAL (Halliburton Co.) wiped out a month's worth of gains on an insane amount of volume. However, it did not knock out any major resistance points and handles the 50 day MA quite well. Take a look at the tail the stock printed as the stock briefly dipped below the moving average. There seems to be strong support at that level.

While I always watch HAL, I won't touch it unless it does on of two things. Either it :

• breaks near term resistance at $32.50, or
• drops into the $28-29 range.
  

There's a lot of support in the $28-29 range, so this area would present a good buying opportunity. Shorter term traders could place a stop just under this range, while longer term traders could do so under the next level of support at $26.50. Note that this area could also provide another good buying point.

For the bears out there, I currently do not see a good, *low risk* short setup. You'll have to wait until price by volume support is broken at $28.

Bullish Chart: JOSB

While my post after the market close reaffirmed my bearish stance, I am finding more and more solid long setups. The health care sector is smokin', with stocks like HRT and ROCM leading the way.

In this market environment, the only longs I'm willing to trade are stocks with high volume breakouts over major resistance levels. This is not the time for me to bottom dwell or buy support. It's just too risky right now. Yeah, some of you can make money playing the bounces of down trending stocks, but that's not my game.

Take a look at JOSB. Here we have the perfect example of a high volume breakout over major resistance. I have a list of about 20 stocks that have made this type of move over the past few days. I am looking for low volume pullbacks to support (prior resistance) for entry. If the stock keeps climbing, I cross it off my list (parabolic moves are too high risk for me right now).

Today's Trades: EWZ and QID

I sold 700 shares of EWZ at $49.74 (entry at $48.44) for a $910 gain (+2.7%). I originally entered this trade as more of a long term swing trade. However, I didn't trust the gap up this morning, since it wasn't on tremendous volume. If I can enter again at support within the next few days, I will. Otherwise, I'm happy with the gain and will move on.

I bought 600 shares of QID at $49.85. QID is a leveraged ETF, which is basically the same as double shorting the Nasdaq ETF. As you can see from the chart below, QID is extremely oversold and at a key support area. The ETF has generally been kind to those who enter at this point, as shown by the arrows on the chart. As you can surmise, I am not confident that the Nasdaq is going to breakout to new highs. However, if it does, this is still a low risk trade. I will place a stop at about $48.85, ensuring that I lose no more than one point if things go bad on this trade.


BTW, I like the pullback in high end retail stocks such as RL, TIF and COH. I'm still not ready to enter, but will be watching closely over the next few days.