In a post last week - Level 3 Communications Inc (LVLT) - What to Watch on a Rally - we discussed a couple of points to keep in mind amid a rally. The first point was that the stock was bouncing from an oversold condition and faced longer-term resistance near 2.50. However, before that overhead hurdle could be dealt with, LVLT needed to overtake near-term resistance, which brings us to the second point. Below is an updated intraday chart of Level 3 Communications.

Chart Courtesy of Thomson Financial

In order to stay focused on the same data points, I had to switch out to a 30-minute bar chart. Here we see that last Wednesday's rally pushed into the resistance we discussed and then ran out of steam. This is the behavior you "expect" to see. Former support zones mark an area where you would expect to see sellers step in. However, the more interesting aspect was that the rejection was fairly mild and today we see that zone penetrated.

In last week's post I said - "How the stock acts at this area should give a clue to how strong the underlying buying demand is." The mild rejection and quick bounce back suggests that buyer are still willing to bid the stock up. This creates an interesting situation because of the heavy short interest. Buying demand may spur some short sellers to take profits which adds more buying demand. That, in turn, has the potential to spur more short sellers, perpetuating the cycle.

The point to watch now is if that former resistance now holds as support on a pullback.