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 look at an example of a breakdown in
McDonald's Corp. (NYSE: MCD).
Unfortunately, many stocks are exhibiting very negative patterns on a
technical basis. We have seen this almost all week long. Stocks forming
breakdowns from previous support, negative Head and Shoulder Patterns,
failed rally attempts with lower high highs and lower lows.
This is happening to “Good Companies”. I really don’t understand why so
many
traders will stay in a stock that keeps dropping and exhibiting negative
patterns.
MCD is a good company. It may put a smile on your face each day when you
eat their food, but it is not putting a smile on investors’ faces.
You can pick just about any negative pattern to characterize this stock.
The stock is on Moving average sells, MACD sells, and channel breakdowns.
Enjoy the food a McDonald’s. Exit or short the stock. It looks like lower
prices ahead.
It is never to late to short a stock.
If the stock is shorted, I would place a stop at 29 �.
