Horizontal Resistance is a trend continuation Yard Chart pattern that is widely recognized in the current technical literature. It can be expected to take in any market up-reaction within a greater down trend. Horizontal resistance can also stand in the way of bull markets that come out of recent or less recent market trend reversals from the bottom.
The market is visibly in a downtrend (see segment 1 in picture A). After reaching a recent low (point B in picture A), it retraces some portion of the downtrend. Having established a high point in the retracement (point C in picture A), the market resumes its down-trend and soon breaks below (dotted line F in picture A) the recent low on a closing basis and continues on to establish a fresh new low (point D in picture A). Having established this new low, the markets loses momentum, and eventually retraces up close to the horizontal level (dotted line G in picture A) from which it started, bringing its leg down to the new recent low.
In expectation of the resumption of the recent down-trend, a limited risk bear trade enters at the point when the market rises close to line A in picture B (point C in picture B). Such trade carries a limited risk because the market should not rise higher than line A, above which a stop loss order should be placed. The same trade presents a good risk/reward ratio because should the downtrend resume without breaking this resistance line, the cost of the stop-loss could potentially be covered many times over. Of course, all stocks do not always follow this behavior in all circumstances. In fact, horizontal lines are often intentionally tested by other traders looking to dislodge weak position holders.
YardCharts delivers two kind of horizontal resistances, and they are denominated 5% and 10% respectively. The 10% alarm is called when the market has retraced up 90% of the distance from the market low in point A to line F in picture C. The 5% alarm is called when the market has retraced up 95% of the distance from the market low in point A to line F in picture C1. Both alarms present advantages and disadvantages with respect to each other. In relation to the HR5%, the HR10% alarm will produce more calls, and will be costlier in case of failure and stop loss. On the other hand, it will catch those "weaker" stocks that will not react all the way up to cover 95% of the recent down trend in order to resume their decline.
Below are shown five real Horizontal Resistances recently called by Yard, which have successfully performed since the day of the sell alarm. In this case, success means that the market in the particular stock has declined a distance that is at least equal three times the entry point stop-loss differential without hitting the stop-loss level. Reference lines, segments and colors are shown exactly as they appear in Section Trading Alarms of YardCharts.
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