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 Ariba Inc. (NASDAQ:
ARBA).
The NASDAQ is starting to move up and I am looking at strong stocks that may
be breaking out of a range.
ARBA held up fairly well over the most recent NASDAQ decline and it is a
stock like ARBA that may be ready to break to new monthly or even 6 month
highs.
The July 20th high of 135 is where we closed today.
If ARBA opens up, it should be off to the races, with all buyers in the last
four months now winners in the stock.
ARBA is still off from the 183 high of March, but this new breakout may get
ARBA moving back towards that high.
I would Buy ARBA on any unchanged or up opening.
I would place my stop at 129 � and move it up as the stock moves up.
Do NOT take any trade if the stock gaps down.
