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 look at Peoplesoft Inc. (NASDAQ: PSFT).
Over the past few days, PSFT has been pushing a long term resistance in the
22 7/8 area.
During this time, support was established in the 20 � area.
PSFT is in an uptrend and looks poised to breakout to new yearly highs.
I would Buy PSFT on this breakout.
I would place my stop at 21 1/8.
