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 PMCS Sierra (NASDAQ: PMCS).
Breakouts can show in a variety of patterns. Many times we are looking at
stocks breaking to new 52 week highs. However, there are many excellent
opportunities to trade a stock breaking 20 day highs, monthly highs, or 3
month highs.
PMCS has not seen these highs since November 7, 2000.
PMCS had a weekly breakout on November 4, 2000 and now the stock looks like
it is ready to break highs in place since early November.
Are we at resistance or will PMCS break out to the upside?
I would wait for PMCS to break 140 and Buy on that breakout.
I would place a stop at 137.
Do NOT play the stock if not in it until the stock breaks out above 140.
