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 Dell Computer
Corporation (NASDAQ: DELL)
DELL is just one example of a stock that looked like it was recovering along
with the NASDAQ that now has broken recent support.
DELL has been trading between 31 and 33 for the last several days.
Dell moved up to this congestion area from a low of 24 a couple of weeks
ago.
With DELL breaking 31 today, it looks like it is going lower.
I would exit any longs in DELL.
An aggressive trader may want to Short DELL here.
If shorted, I would place a very close stop at 32 �.
If DELL gaps up in the morning, do NOT Short the stock.
Many stocks have similar patterns.
