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.
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's look at Applied Materials (NASDAQ: AMAT).
For the past week we have been looking a number of stocks that were
mirroring the NASDAQ in a congestion range waiting to break up or break
down.
On Monday, June 19, 2000, we saw the NASDAQ breakout of a trading range and
many
stocks broke out too.
I hope you used techniques described in this column to profit during your
trading.
The NASDAQ stocks should follow through tomorrow.
AMAT is a stock that looks ready to break also.
A trade above 96 � would be a breakout in AMAT and I would want to be long
the stock.
If entered at 96 �, I would place my stop at 94 �.
If AMAT opens down, do NOT take the trade. We may see a retracement here.
