“I cant believe it, but I have to and I must.”
The quoted words are truth spoken as it pertains to the stock market. Granted, I’m borrowing the line from a recent conversation I had regarding an unrelated subject, yet it’s still relevant to trading.
Stocks will often churn between support and resistance levels for weeks and even months before any significant change in trajectory materializes. Traders often can’t believe what they are seeing, frustrated by the lack of significant range in the price action.
It’s this slow burn of options premium that allows for so many options contract writers to profit in limited range trading environments, where neither the bulls nor the bears are able to move a stock much in either direction. To be successful in this game, you’ve got to believe what you’re seeing, and you have to respect price action.
Let’s take a look at an example to illustrate my point. Walt Disney Co (NYSE:DIS) seems to be struggling to push further ahead as it trades above the $110 price level:
Per the weekly and daily chart above, the stock has maintained an impressive bullish run since it pushed above the $100 level in early February. More recently, DIS traded as high as $113.30 on 5/5/15. Since the end of April, the stock has essentially traded between the $108 support level and $111 resistance level.
At this point it’s hard to say what comes next for DIS. The price action still seems to be in favor of the bulls, as the bears have struggled to hold the stock below $110 for very long. However, the ADX line is nearly flat lining on the daily time frame and thus confirms the trading range environment we are in; notably, -DMI is starting to creep above +DMI, so the bears are starting to exert some selling pressure at or above the $111 level.
If DIS closes above $111, I would consider this a bullish signal since it has thus far not managed to close above this price point. The RSI indicator is inconclusive at this point on the daily time frame, though it has been trending down slightly and has failed to break above the 60 level, so any further push below it would further support the bearish case. The MACD has been below the signal line on the weekly chart for a few weeks now, so the momentum of the bulls may be waning in the intermediate term.