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 a potential breakdown in American Express (NASDAQ: AXP).
The financial group has been one of the stronger groups over the past couple
of weeks.
Many of these stocks have moved to new highs.
A review of a chart of AXP shows us an interesting pattern of resistance in
the 60 � area.
Several times over the past month, AXP hit the 60 � area and has moved off
it.
During the August 22 time frame, AXP looked like it was going to have a real
breakdown as the stock dropped from 60 down to 55 � over the next few days.
Another attempt this past week to break 60 � was attempted, but once again
it looks to me that it is failing.
Friday was generally a strong day for equities and a good day for bonds.
AXP is an interest sensitive stock. Yet, AXP moved down Friday.
AXP is on a MACD Sell, a Moving Average Sell and is ready to break the low
of the last 20 bars.
I would sell AXP on any morning weakness.
I would place a close stop at 59 �.
I am looking for a breakdown here in the stock that could take it over the
next couple of days below the last pivot low at 55.
