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Short-side Setup in Schwab (SCHW)

If SCHW exhibits another weak day, it's a green light for the bears.


Video Transcript

Hi everyone, it’s Serge Berger from The Steady Trader. I thought I would look at the broker/dealer complex, and we can start quickly by looking at the Financial Select SPDR (NYSEARCA:XLF), which is generally for financials.

In the video, I look at the chart from May 1 and you can see the ETF had a bit of a down day. Not all too dramatic, but it does make me look at the NYSE Arca Securities Broker/Dealer Index (NYSEARCA:XBD) chart. We can see that Wednesday’s sell off was much more pronounced, at least by the candle being a little bit longer red, so a bit of an outside engulfing day yesterday.

That led me to look at some of the constituents of the Broker/Dealer Index, and it brings me to Schwab (NYSE:SCHW). I’ve talked about Schwab before in early February where it was going absolutely vertical. Eventually, SCHW did pull back; we were just a few days early before that.

The stock is now getting back to a very critical support level. You can see Wednesday that the stock had a very nasty down day, very visible. In a lot of my swing trades, I like to look for very obviously visible candles that scream to us saying, “Look at the chart more closely for a potential trade.”

If we look at some of the other guys in this complex, even things like TD Ameritrade  (NYSE:AMTD), note that it’s in a similar pattern. It had a pretty decent down day Wednesday on its way to potentially make a lower low after making a series of lower highs.

Back to Schwab, what really is interesting here is that not only is there very clear support, but if you break below this on a daily base – and, arguably, we may have already marginally broken this Wednesday, though you really have to squint to see it – I think, more important, is that we have very nicely defined support areas below as potential targets.

On any daily close below the support line, which basically means Wednesday’s lows around $16.20, the next support line if you measure the Fibonacci retracement off the November lows, you get to about a 50% retracement, which is around $15.40 to $15.50. That is about 4% lower from Wednesday’s close. Below that, the next support is not until about $14.70, which is a 61.8% Fibonacci retracement of this entire move up.

Additionally, for those more keen on patterns, you can see there is, arguably, a head and shoulders pattern in place, as I show you on the chart in the video. This also works well to take SCHW down to about $14.70.

Taking another measurement over this, we can look at basic moving averages. You can see that, right now, we’re sitting at the 100-day moving average, which is the blue line on the chart in the video. We have resistance at the 50-day moving average and, if we were to get down to the $14.70 area or so, which is the 61.8% retracement, it gets us to about the 200-day moving.

So, very nice things setting up here at a very defined level. Any movement about the 50-day moving average, obviously, would get anyone who is short this stock to cover because then the chart would get bullish again. I like this setup here for the bears, but I would like to see one more day – or at least half a day of weakness – before potentially getting into this trade.

Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for hisfree weekly newsletter here.

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