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.
This column tries to present historical examples, potential set
ups, and examples of entry and exit strategies.
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 are 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 JDS Uniphase (NASDAQ: JDSU).
This stock had late December support in the 160 area.
A head and shoulder formation has formed at this 160 level and today,
Thursday, JDSU broke below this support line.
JDSU moved quickly lower on this break and would expect it to continue
lower.
The ideal entry would have been on the break of 160 or the break of
yesterday’s low at 153.
I would exit longs in JDSU.
An aggressive trader may want to consider a Short on any morning weakness.
I would place my stop at the 161 area.
If JDSU opens up, do not exit or short the stock.
