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 Genome Therapeutics, (NASDAQ: GENE).
For the past month, GENE has been in a trading range.
The stock has traded between 19 and 22.
On almost any given day, a Market Call could have been written on GENE over
the past few weeks.
But today, August 24, 2000, was the day of the breakout.
Notice that the stock broke out of resistance and moved up on very heavy
volume.
This break confirmed by volume are the best performing breakouts and by
looking at this chart, it should serve as a lesson when other breakout
possibilities are presented here or if you see them in stocks you are
following.
If there is a pullback to 23, GENE could be bought with a stop at 211/2.
If it keeps running, just look for other breakout opportunities.
