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.
I would like stress that one key in pattern recognition or indicator trading
is to understand your time frame and investment objectives. Certain
patterns on a daily chart may look completely different than by using a
60-minute chart. Traders that use 5-minute charts may also have a different
picture.
For the purpose of education, 60-minute charts are used here.
Let's look at Applied Micro Circuits,
(NASDAQ: AMCC).
Here is a stock that has a defined support area at 65 �.
Each time over the past week despite a more NASDAQ and weak tech stocks,
AMCC has been able to hold support at 65 �.
If you are holding AMCC, or want to Buy the support area here at 65 �, that
may be an appropriate play.
However, if AMCC breaks 64, I would exit any longs in the stock.
If you want to Buy support at 65 �, place a stop and reverse at a break
below 64.
