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, 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 that someone 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.
Stocks breaking to new 52 week highs is one of my favorites.
Let's look at Level 3 Communications (NASDAQ: LVLT).
Since the middle of January, LVLT has been in a nice uptrend.
Over the past few weeks, LVLT has been in a broad congestion area with
resistance at 120.
On Monday, February 7, 2000, LVLT broke to new highs moving above 120.
This is the breakout to new high pattern. I would expect LVLT to continue
to move higher.
I would Buy LVLT on any move above 122 in the morning.
I would place my stop at 117.
