XING: Rally Into Resistance

(Click On Chart To Enlarge)

From yesterday's post:

"We're now into October, and after going through that rollercoaster ride in that example, anyone who went through it finally got a chance to "break even" yesterday, if they bought at prices in the low 12.00s last winter.

"Whew! Lemme OUT!"

Not everyone will feel that way, of course, but many will. How many? It depends on how MUCH resistance there is. In this case, it's roughly September, 2006 to July, 2007, which is about 10 months, so fairly substantial."

In a nutshell, yesterday's trading activity was a very good illustration of how a "barnstorming" rally into resistance (10-month's worth) often plays out: a reversal, and a close in the red.

We can make excuses, and say that XING reversed to the downside because of the analyst's negative call on BIDU, "so all Chinese stocks went down." Or, "The whole market reversed, and went down!" Or, "We had weak-handed longs who bought the gap up opening and got trapped at prices above $13, so that's why XING sold off!

What have we got? EXCUSES.

Yes, anyone who bought XING yesterday over $13 probably got panicky and sold (weak-handed long). It's certainly reasonable to make that assumption. But, does that explain the reversal of ALL of the day's gains, and the closing in the red at "the bottom rung" of summer resistance (the June, July rectangle on the daily chart, the lows of which are 12.10 ...12.08 ...12.10)?

I don't think that it does. Why? Because we knew from our discussion yesterday morning that for the first time since the summer breakdown, the longs who have been trapped at prices above 12.10...12.08...12.10, going all the way back to late last year, were finally being given an opportunity to "get whole" in the $12s and low $13s, and to sell for a "break even." And, many players are trapped at prices higher than that, all the way up to $19. Some of them are willing to sell at a smaller loss, in the $12s and $13s.

What was their reaction (10-months worth of trapped longs) to the gap up opening? It varies, of course, but the "greed" factor that we all deal with goes something like this: "Gee, I've been holding XING at 13.00 for months. Now, it's finally trading above that! Oh, boy, I'm going to make some money on this. FINALLY!"

Then XING reversed to the downside. Now, the "fear" factor that we all deal with takes over: "OMIGAWD, I could have sold above $13 today, and now XING is tanking below that...now it's going back to UNCH....now it's gone red!"

PANIC.

And, not just panic from the "momo" crowd who just bought XING yesterday morning, but panic from trapped longs (10-months worth) who missed their opportunity (at least for the moment) to get out "whole."

We can say, "But, 'all' stocks went down yesterday!"

No, they didn't. Sinovac (SVA) and Gigamedia (GIGM), just two examples of stocks that don't have the kind of resistance that XING does, didn't reverse to the downside. They closed well in the green.

We don't want to make excuses for stocks. If we're AT resistance, let's try to be objective, and recognize that fact. Yesterday's rally was a "foray" into that resistance that failed, and closed at 12.07, right at the bottom rung of summer resistance: 12.10...12.08...12.10.

Very short-term: Everyone who bought yesterday at prices above the 12.07 close on a 3 million share reversal day, and who didn't sell the reversal is a potential "weak-handed long," who might want to sell on any rally here.

Longer-term: We've still got 10-months worth of "trapped longs" to work through.

Fundamentally, something like the release of an outstanding earnings report could trump the technicals, with something like a gap up above $12-$13 resistance, but absent that, yesterday's Volume Reversal Close left us at "the bottom rung" of resistance.