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 short term Support and Resistance in Dell Computer
Corporation, (NASDAQ: DELL).
The battle of support and resistance goes on all the time. On many stocks,
the support and resistance areas are very clear and a stock will trade in
that range over a long period of time.
These support and resistance areas set up low risk trades in these stocks.
A trader can Buy support with a close stop and sell when a stock hits
resistance.
DELL has support in the 40-41 area and resistance in the 45-46 area.
December can be a slow month for trading and many stocks may be range bound.
Last week, DELL hit resistance in the 45 area and has now come back to the
41 area.
The MACD has turned positive.
As a low risk trade, I would Buy DELL at 41 limit, with a stop at 40.
I would be happy to sell at 45.
This is a 4-1 risk reward ratio trade which is what I look for when trying
to Buy support.
