With the Dow Industrials now in positive territory, the S&P 500 Index edging into the green, and the NASDAQ Composite near the break-even level, we're going to update our short on shares of International Business Machines (IBM) and give some insight as to how the trade was set up and where stops should be for short-term traders and swing-traders.
International Business Machines Chart - 60-minute interval.
Yesterday, we alerted traders that shares of IBM might make for an attractive short at $86.63 (point A on the above chart) as the stock looked to be having some trouble with the 50-period MA and was close to a level of downward resistance. We liked the fact that the stock had broken an upward trend (support broken!) near $94 and liked the most recent rally from the $80 level to where the stock could be shorted (A). Our target yesterday was the $81 level and level (B) is at $81.50. While the Dow Industrials are trading in positive territory currently, shares of IBM aren't participating. We know too well about how important the major indexes roll plays in investor psychology and we really don't like to try and short against the trend (currently the broader market bias is bullish and a short in IBM is bearish). With this in mind, short-term traders should either lock in their $1 profit here, or move their stop down to break-even (A). Swing-traders that want to let the trade run its course can also move their stop down to (A) or at a minimum, use our downward trend (swing- traders stop trend).
Dow Industrials Chart - 60-minute interval.
The Dow Industrials (INDU) are trading at a session high and are flirting once again with our "long-term resistance". Yesterday a reader had a great question. "Why is your trend not set right at the top of the activity near 10,900?" The reason that our chart looks a "little sloppy" is that this "longer-term resistance" trend was put in place from the September 6th high and the November 6th high. True, we could "adjust" this trend so it looks better, but now some might say, "they're putting a carrot in front of the horse". While this resistance level may not look very appealing, it's a trend we want to observe. The fact that this index has been able to trade above this level adds to our earlier observations made months ago that this index is technically stronger than the S&P 500 (SPX.X) and NASDAQ Composite (COMPX). Notice how we've left some "older" trends in place. The intermediate-term support (IT-Support) gives us hint that this index is "back on trend" and is a sign of strength! We recently added a short-term support (ST-Support) trend to give us an idea of how to manage bullish trades in this index. Level (A) was a short-term level where we were looking for the INDU to trade at to give us CONVICTION in our short trade in IBM. Level (A) was never achieved and for a short-term trader that is short IBM is a VERY GOOD REASON to book a profit while they're profitable. If readers will remember what we said yesterday about the odds of making money short in shares of IBM if the Dow Industrials went to 11,000. We said the odds weren't good if a broader market indicator (which IBM is a component of) turned higher. As a trader, if the bulk of the plan doesn't unfold in our favor and we're still profitable, we'd rather book a profit and move to the sidelines. Then trade bullishly in stocks that are in upward trends. Yes, IBM is currently a weak stock in a strong index, but we understand the broad market trend and can use it to understand how to manage our trades. If the Dow Industrials turn south from here, who do you think might lead the charge south?
S&P 500 Index Chart - 60-minute interval.
IBM is also a component of the S&P 500 (SPX.X). This index has broken our short-term resistance (ST Resistance) this morning and bullish traders will be targeting the 200-period MA (thin red) at 1,341. Notice how this index is "back on trend" as it is trading back above our short-term support (ST Support). A prudent trader would also add a new level of short-term support that is upward trending from the recent lows. Once you do that, you'll notice the steep upward trend of that support. Here might be another "positive" that works as a negative for shorting in today's current market environment. Remember that we are traders, not investors!