Support and Resistance. How to trade it.
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 is winning 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.
Let's look at Lycos Inc., (NASDAQ: LCOS).
Over the past few weeks, LCOS has been in a trading range between 51 and 59.
It clear where buyers are coming in to buy and sellers believe there is
fair value is and they are selling.
A breakout style trader might not trade a stock looking like this, but an
oscillator-based trader looks for these set-ups.
The oscillator style of trade would be selling LCOS now at resistance, with
a stop above Friday's high at 60 �. He would be looking for LCOS to
come back in the 51 area.
One purpose of this column is to get you thinking about trading style and
the use of indicators and patterns in your trading.
The failure of LCOS on Friday to hold the 59 area, would make LCOS a Short
candidate with a Stop above resistance for the trader looking to Sell High
and Buy low.
I would Short LCOS here.
I would place a Stop at 60 �.
