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 are winning 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’s look at the Kana Communications (NASDAQ: KANA).
After a 50% decline in the past couple of months, KANA has been forming a
base in the 30 to 37 area.
This is the same level that KANA was in April of this year before moving up
to the 75 range.
Once again, Bulls and Bears are fighting KANA will either break this range
to the up side or move back and break it to the down side.
It looks like the break is to the upside. KANA broke a 20 bar high today.
The way to play these breaks is to Buy with a stop in the middle of the
range.
I would Buy KANA here with a stop at 35 �.
