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 Ditech Communications.
One important lesson I have learned is that the stronger stocks tend to stay
stronger and the weaker stocks tend to get weaker.
If rallies have lower highs than the previous highs and lower lows, that
pattern is more often going to continue.
Once again, DITC had another failed rally in which the rally highs are lower
than previous peaks.
DITC looks ready to break a new 20 bar low and this low is also a 20 day low.
I am not sure what happened to this once high flying company that sold for
$140 in March of this year. But buying stocks on sale is not a good
strategy.
Buy your clothes, cars, and computers on sale, not your stocks.
I would certainly exit any longs in DITC.
I would Short DITC here.
I would place my stop at 54 �.
