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 battle in United Parcel Service (NYSE: UPS).
From the chart below, I think it is clear that the sellers believe that fair
value is 64.
The Buyers believe fair value is 56.
All during the past couple of months, the sellers have shown clear
resistance at 64.
Will UPS break 64 now?
I don’t know. What I do know is that if UPS breaks 64, I will be a buyer.
As the stock breaks resistance, all of the sellers would have sold their
stock and possible the stock has changed from sellers to new buyers entering
the stock.
Once again Thursday, UPS closed strong on its high. It may break a channel
high tomorrow.
I would place an order or set up my screen to Buy market if the stock hits
64 �. The order would be, Buy UPS 64 � Buy Stop.
If UPS breaks out of this month long resistance, I will be in.
If the trade goes off, I would place a stop at 62 �.
