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Technology Stocks : Compaq
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To: Lynn who wrote (52679)3/10/1999 11:46:00 PM
From: Christopher  Read Replies (1) of 97611
 
What is Support and Resistance anyway!!

Let me give you an example of Support. Suppose you have a stock that is around 50 with an average daily volume of 500 thousand shares. Let say this stock now goes down to 30. Many people will think it is a good buy or bargin buy now and let us say in one week 30 millions shares exchange hands(a lot of new bargin buyers). Say the stock now instead of going up as the new shareholders hope for it continue to go down to 10. What happen to the new shareholders who bought the stock at 30? They are in pain since they have suffered 66% loss. The 30 dollar price become a resistance now or sometime called overhead resistance or sometime called overhead supplies. The 30 millions share that were traded in one week become the overhead supplies. You say why? Read on.

Let us say that now the stock moves back to 30? What happens now? The new shareholders who bought their share around 30 would want to sell their shares and break even. How many shares do you think will be put to sale? try 30 millions. I am not really saying that 30 millions will be put to sale but let us just say that millions of shares will be put to sale. People want to break even after having witnessed 66% loss. What will happen to the stock? It will start coming down now. So the stock will have a hard time breaking thru 30 since millions of share will be put to sale. This is why the 30 dollar value is considered a Resistance.

Let us say the first time the stock hits 30, 10 millions shares are put on sale and the stock turns down to 20 as a result and then go back again to 30 afterward(say in one month time). Another 15 millions shares now are put on sale and the stock goes back to 20. How many overhear supply are left? Five millions shares. The third time the stocks goes back up to 30 then it will have a very good chance of breaking thru it.

Support is just the opposite of Resistance. At 23 and 30 dollars support for CPQ, a lot of people bought shares before CPQ went to 50. They won't be selling since they have not suffered any loss so far and are hoping that CPQ will turn back up and go to 50 again.

Hope this helps.

Good trading,

Christopher
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