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 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.
Let look at Citigroup Inc. (NYSE: C).
Last week, C had an excellent week.
On Friday June 2, 2000, C gapped open and stayed steady all day.
Today, June 5, 2000, C held steady again without much of a retracement.
This is a pattern that, when a stock breaks out, can continue running.
I would Buy C on a breakout again of today’s high at 66 �.
If the trade were entered tomorrow, I would place my stop at 65 �.
If C does not take out the high, do NOT take the trade.
