As the NASDAQ continues lower moving below the breakout area, we still need
to focus on exit strategies.
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 an example of a potential
breakdown in
Amazon.com (NASDAQ: AMZN).
After a rally on July 14, AMZN has been in a trading range between 40 and
43.
Bulls and Bears are fighting to see which direction the stock will move
next.
On Monday, AMZN broke support and I anticipate AMZN will move
lower.
Is this earnings related? I don’t know, but the technicals look weak.
I anticipate that a major break is looming.
I would exit longs in AMZN and establish a Short position on any morning
weakness.
I would place my stop at 41 �.
