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Dealing With Flux Periods
Time to review support and resistance levels. Why? Because sooner or later the market will be in a "flux" period where they
are too nervous to just buy up anything. During a time like that the market is simply "news" and event driven and it becomes
important to look at charts again and focus on support/resistance lines. Why? Because stocks that "set up" in a pattern,
whether it's a double top, a cup and handle, or a double bottom, etc. will get looked at by the technical traders. So, as a
refresher to charting, let's start with the basics.
What is a support level? Basically it is a "price" that a falling stock will "stop" at. Suppose a stock starts falling,
whether it is because of a weak sector or because it is simply out of favor and attracting short sellers who are betting that
the price will fall. (Just as a note, short sellers actually sell shares of stock hoping it will fall. Because they have
"borrowed" the shares they sell, they hope to "repay" them by buying the shares later at a cheaper price. If a lot of "short
selling" hit's a stock, it can drive the price down significantly). For the most part it will fall to it's next support
level. This is an area where the sellers have for the most part been flushed out and the buying and selling is now about
equal. This will halt the slide but not bring it back up. Whatever that price is at the time the falling stops now becomes a
Now suppose that a stock finds a support level at $50 and then begins a strong upward move. When it reaches $58 selling hits
and down it comes, but it doesn't fall all the way back to 50 (not if the overall trend is up) and "flattens out" at $54.
This means that the bulk of the sellers have taken their profits and moved on and enough new buyers are "supporting" that $54
price. We now have a new support level. Now suppose the stock moves up again, but it doesn't have the momentum to really get
going so it makes it to $56 and starts to fall again. We would expect it to stop falling at that support level of 54.
Now suppose the stock starts to run again and this time it's a powerful run. It blasts through 58 and goes all the way to 62
before fading. At this point we wouldn't expect it to fall back to it's old support level at 54; we would watch for it to
create a new support level. Sure enough, we see that it only falls to 58 this time. We have a new support level!
Something else just took place--did you catch it? The new support level is at 58, which is just where the stock ran up to the
first time! Hmm. Interesting, huh? This is where technical analysis is fun. Why? Because 58 was a resistance level just
awhile ago! What is a resistance level? Basically, it is a price that a stock reaches before falling back. In our example,
the stock was 50 and ran up to 58 before fading. Hence, 58 became a resistance level.
Resistance simply means that at $58 there began to be more sellers than buyers. As the stock was powering up from 50, the
momentum and the excitement kept people buying, but the higher it went the more people started to take their profit.
Eventually the price got to a point where people were afraid to keep buying. You know the feeling: Gee, it's already moved 8
points - how much can it have left? At the same time, owners of the stock start to sell to lock in their profit's. The stock
hit's a high, runs out of gas and starts to slide. It has formed it's first resistance level.
So, this is the basics of all stock movement between two "points", support where a stock doesn't want to fall under and
resistance that a stock has a hard time getting over. Sometimes you will see a lot of stocks moving up and then get "wedged"
right under or "at" their resistance areas and this is where you get to make decisions. When a stock is snuggled up to a
resistance it needs some kind of push to get it going. If instead of good news the market hears of war/terrorism, etc. it
tanks and the resistance area on the stock gets stronger and usually the stock falls back. A perfect short.
Naturally the other side of the coin is that the "overall market" rallies on some "good news" and the stock breaks over that
resistance and puts in a nice run. A perfect "long". You should do your own checking too, so that you have more of an arsenal
to choose from on any given day and use support and resistance levels to gauge your entries.
Last edited by drunkguy : 02-06-2007 at 07:28 PM.
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