Jeff:
I know you realize the following, but I thought I'd post it anyway for the lurkers out there. Some charts that illustrate the following points (and more) can be found at intelligentspeculator.com
Classic TA says that resistance, once broken, should become support. Of course, MAN didn't have resistance at $6, as it actually ran through that level in a single day. Subsequently, a minor swing low formed just above $6 to indicate that buyers believed the stock was undervalued at that point and they outnumbered those taking profits.
Now, what happens if this support level, however weakly tested, gets broken? It will become resistance because price will have demonstrated that the valuation given by buyers at that level and above was incorrect (at least in the short run). Below $6, there will be alot of buyers that are trapped, wondering what will happen to their shares. The further it moves from $6, the more anxious they will become and the more likely it will be that they will bail when the price returns to somewhere near the level at which they entered, thereby creating selling pressure. Thus, the further price moves below the broken support, the stronger that resistance will be when the price returns to that level.
Of course, this is the generic case ... each stock needs to be watched to see how price behaves in and around support and resistance. Being a successful technical trader doesn't require that you be able to successfully analyze where the stock is going ... you might not be right even 50% of the time. What it does require is that you estimate, given the price pattern, what you think the likely move is, then after entering immediately place a stop order so that you will be taken out of the trade immediately if it goes against you. Unless you do the stop-loss thingy, its a given that you will start to "hope" the stock will be valued "correctly" by the market at some point in the future -- which may well come, but in the meantime your capital is tied up at the best, and at the worst it gradually disappears until you can't take it anymore and close the position. |
