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 and Breakouts
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 has won 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.
One interesting pattern that traders see after a breakout, is that the
stock or index retraces a part of the initial move by about 50%. If the 50%
retracement does not hold, the stock or index can still be in a trend if
the previous breakout resistance holds.
Let look at Tellabs Inc. (NASDAQ: TLAB).
After a nice rise from 66 to 76, TLAB retraced about 50% of this move.
This is very normal for a stock to retrace part of a big move as traders
take profits and a level where Buyers once again come into the stock is
established.
Once the selling stops, we often see the stock continue in the direction of
the trend, which for TLAB is up.
Today, January 18, 2000, TLAB opened up near Friday’s close and traded up
all day.
A new Support level has been established and TLAB seems poised to break
resistance from the 13th at 72 �.
I would Buy TLAB if it breaks that high.
This would be accomplished by Buying in the morning if TLAB trades at 72
7/8 or by placing a Buy Stop at 72 7/8.
If the stock is continuing up, you are in the trade. If it can not break
through, you do not enter.
If the trade were entered, I would place a stop at 71.
