Trading Intraday Resistance Levels and When to Exit

05/28/2010 12:01 am EST

Focus: STRATEGIES

Michael Bellafiore

Author, One Good Trade: Inside the Highly Competitive World of Proprietary Trading

A few days ago, BIDU came off from 73.30ish after a gap open. 72.50 offered resistance on the tape. I started a small short. BIDU came off another point, but then things got even more interesting!

72.50 was a level that we spotted on the tape, and BIDU traded off another point from this weakness and resistance level we spotted. But BIDU came back to this important intraday resistance level of 72.50. I shorted again, this time with a little more size.

72.45 showed weakness. And then a huge offer entered our open book at 72.50. I shorted some more.

I am not a big fan of shorting in front of just a big offer. For this trade, I saw weakness on the tape previously at 72.50. I saw some more weakness at 72.45. The market overall was near a resistance level from Friday at SPY 109.30ish. BIDU had more room to fill in the gap. On the long-term chart, 65 could be revisited, and there was a bid offer in our open book at 72.50.

BIDU closed near 71, filling in the gap. Some on our desk were able to catch most of the move.

chart
Click to Enlarge

The above is an intraday resistance level trade.

Afterwards, I was asked a question about holding on to such a position.

The trader asked:

At 1pm it was the last time BIDU touched the 72.5 level. What followed was sideways consolidation for a long period of time, and some spike ups and what looks like higher highs. Even though 72.5 is a solid level, what are the reasons for not taking off the majority of the position when the stock struggled at 72.0? What is the optimal amount of time and space to hold bidu, it looks like the trend gets broken several times. Is this a trade that you should simply hold for a certain timeframe (eg hold until the close, either it works out or it doesn’t). I don’t see too many reasons for holding unless you project a market selloff into the close. I’m interested in your thoughts.”

My response:

1. I covered 1/4 of my position at 72 and 1/4 at 71.70. I held the rest.

2. There is no right answer to this question. It is entirely possible that the cover at 72 made sense to you, a 1/2 cover made sense to me and we were both correct for our trading system. In fact, one of our better traders didn’t cover anything at 72 or 71.70 and that made sense to him.

3. The market was at a resistance level and there was a chance we would crack. That was one of the reasons I did not want to get flat at 71.70. When the market is as volatile as it has been, you want to anticipate a bigger move and position yourself safely for such an event.

4. BIDU was in a bullish flag pattern. And the tape showed weakness at 72.50. And there was a huge offer at 72.50. And the market was at resistance. You see consolidation and I see weakness and resistance.

By Mike Bellafiore of SMB Capital

Mike Bellafiore is a trader and partner at SMB Capital. He will be speaking at the Los Angeles Traders Expo in Pasadena in a few weeks. Register to attend here.

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