BP Gives a Lesson in Dual Timeframe EMA Key Levels to Watch

Nov 24, 2010: 3:50 PM CST

What is the current chart picture of BP shares, after the bad press from the oil spill has died down?

It turns out they’re compressed between two timeframes of key EMAs, which gives us an excellent chance to take a look at this concept and watch what happens with the eventual resolution of these boundaries.

Let’s first start with the Daily Chart then move up:

What I like to do is show real-world examples of concepts of how to use technical analysis tools or strategies.

In this case, we’re talking about EMAs for key price levels to watch – either as zones to put on new positions within the context of a trend, or take off positions either on a test of a higher EMA or on a trendline breakdown.

On all my charts, I use the 20 and 50 period EMAs (exponential moving averages) as that’s what I’ve found that work for me, and it’s what a lot of traders use so it serves as a good reference level.

I also use the standard 200 day SMA.

EMAs work to ‘contain’ price on pullbacks to them during trending periods – but not so much during flat or range-periods.

Compare the price action – and EMA ‘effectiveness’ from April down to July, and then from October to present – noting the ‘failure’ period during the consolidation from July to October’s breakout.  That alone is a good lesson.

But now, price is compressed between these two levels and competing for a breakout one way or the other.

As both key moving averages are converging (the 200d falling while the 20 and 50d are rising), price is going to have to break through one of them, which could create a trend continuity play to the upside above the $43 or especially $45 level… or a trend reversal play on a breakdown under $40.

For short-term and swing traders, those should be your key levels to watch, both from a moving average perspective (boundaries) and from prior price levels ($44 in November and $40 in October).

If that’s the structure on the Daily Chart, what exists one step higher on the weekly chart?

Glad you asked!  It’s a strangely similar compression.

I put arrows back on the chart history to show all the times the EMAs were ‘effective’ in providing low-risk entries into established trends (and the two times in May ’09 and May ’10 when price broke the 50 EMA sharply, signaling a REVERSAL in trend).

Take time to study those opportunities and how they played out.

Bringing us to the present, we have a similar EMA compression and price is trapped right in the middle of it – this time between the rising 20 EMA and falling 50 EMA respectively.

The key levels to watch here are similar to the daily levels, with the 50 EMA being overhead resistance at $43.38 and the 20w EMA being floor support at $40.92.

Compare that with the 200d SMA at $43.58 and the 50d EMA at $41.04.

What’s going to happen?  Who knows.  As a trader, you’re not supposed to know the absolute future to be able to profit from it.

You study the chart, assess the structure, define the probabilities, and then if you feel an opportunity presents itself, position into the price action that triggers an entry (or exit in the case of a stop-loss).

That’d be a bullish price break above resistance at the $44 or even $45 area… and a bearish price break under the $41 or $40 level.

This is in-line with the Mark Douglas (Trading in the Zone) style of logic where you find levels that price must inflect, as price cannot stay between these levels forever.

Usually, a key breakout from an important level leads to a tradable short-term price swing in the direction of the breakout, with the stop placed just under the breakout in the event the set-up fails and devolves into a frustrating  trap.

Keep watching these levels and take time to refresh simple trading tactics with EMAs.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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