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 Spectra-Physics Lasers (NASDAQ: SPLI)
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.
Some of my examples did not breakout, so I thought I would use today’s Market
Call to show you one that did.
After congestion in mid June, SPLI started moving up to a previous high in
early June.
On June 20, SPLI broke the high at 55 and just ran and is up to 65 today.
Look for these breakouts to new highs, but always wait for the breakout. If
it is going to happen, there will plenty of profit in the trade.
