The purpose of this Market Call section is to
educate readers in technical analysis patterns and indicators. As with all investment
information, you need to research information and consult your financial advisor before
initiating any strategies that are contained in Market Call.
Also, you must realize that as with all trading strategies,
opinions can change quickly depending on market conditions and developments.
Is it Support or the beginning of a new trend? Let the market
tell you.
Support and Resistance
Think of security prices as a war. It is a battle between a bull
(the buyer) and a bear (the seller). The bulls push prices higher and the bears push
prices lower. A buyer that feels an area has good value, will buy at that level. The
seller that feels that a stock has reached fair value, will sell at that higher fair value
price. The direction prices actually move reveals who is winning the battle.
Remember when a trade takes place, a buyer and seller agreed to a
price. There was a buyer and a seller involved in the transaction. The buyer feels the
stock will go up. The seller wants to move on to another stock that he may feel will
appreciate faster.
Support levels are the price where the majority of traders feel
the value is a good buy. Resistance is the level in which the majority of traders feel
prices will move lower.
When the majority of traders and investors change their
expectations, these support and resistance areas get violated and a new trend may be
beginning. This can occur due to changes in expectation of earnings, new product
development, change of personnel, cut backs or expansions.
Let's look at the Dow Jones Industrial Averages, $INDU
Over the past two months, the $INDU has been in a trading range
between 9400 and 11,000. After hitting 11,000 in mid May, the $INDU retraced its most
recent breakout from 10,000 down to the 9400 level at he end of May on the 26,27, and 28.
A move up from the end of May lows brought the $INDU only to the 10,900 level on June 7.
On June 8 the $INDU gave Sell signals using both the Moving
average Crossover method and the MACD indicator. We are still on Sell signals on both
indicators. Momentum, also turned negative.
If support is going to come in on the $INDU and therefore on many
Dow stocks that mirror this index, the $INDU should find support in this area. If the
$INDU and therefore many Dow stocks fail to find support here, an important Support area
will have been broken and a possible new trend established.
If you are still in the $INDU and did not take any of the Sell
signals, I would not exit immediately. I would wait for a confirmation of how the $INDU
will handle this support level.
If I had no position in the $INDU, this is how I would allow this
pattern to set up my next trade. If the $INDU holds this 10,400 level, I would Buy the
$INDU at 10,700 as it starts moving up. If the $INDU falls below 9,300, I would enter a
Short position a soon as I could on the break.
As with all trades, the use of stops is critical. There are often
false breakouts and false support breaks that do occur. A stop after entry of 200 points
would be my choice.
Good traders have a plan and know how they will react before the
market talks to them. The market is always right. Listen to the market.
