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 Tellabs Inc. (NASDAQ: TLAB).
When a stock performs better than the overall market, I usually take notice.
Despite a down NASDAQ, TLAB looks like another stock forming a base with
defined support and resistance.
We do not know which way the break will be; however when a stock is strong,
the break is usually to the up side.
Yesterday’s Market Call did not breakout today, and TLAB may not tomorrow.
But if TLAB breaks today’s high, I want to be in for the possible upside move.
Once again, wait for the actual break.
I would place a Buy stop at 47 15/16
I would place a stop at 45 �.
If TLAB does not break today’s high, do NOT take the trade.
