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 setup forming for a
breakdown - MRV Communications
Yesterday we looked at Exodus Communications, EXDS for a possible breakdown.
Today, we can look at a similar pattern in MRVC.
MRVC has been in a trading range between 51 and 62 for a couple of weeks.
The stock today broke that 51 support.
My expectation is that the stock will continue lower.
I would exit any longs.
An aggressive trader may consider a short here.
I would place a stop on a short in the 49 to 49 � area at 51 �.
Just as a stock breaks out to the upside to new highs for a period, other
stocks will breakdown after hitting stops and confirming a downtrend.
Unfortunately, many stocks are also at critical support. Be careful and
focus on protective stops.
The NASDAQ is also at a critical support area.
