Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Microcap & Penny Stocks : ProNetLink...PNLK...Click here to enter -- Ignore unavailable to you. Want to Upgrade?

To: FlatTaxMan who wrote (11701)	3/20/1999 7:19:00 PM
From: terri acey	Respond to of 40688

Since we have been discussing support and resistance levels just some basic reading for newbies on the subject... Just slightly off-topic... This is from "The Blanket" ..... SUPPORT and RESISTANCE - The Blanket, 05-Mar-1999 "XXX is trading just above its 50-DMA support level and needs to hold this level in order to prevent any further declines." "XXX is now testing resistance at its highs for the fifth time, which indicates strong resistance. " Ever seen either of these messages? Another one of the many factors to take into consideration when deciding whether or when to enter a position in a stock is SUPPORT and RESISTANCE. Like MOVING AVERAGES discussed last week, it is one of those indicators that, when used in combination with other indicators, can be a very powerful tool for analyzing potential investments. ******************************** Let me create a picture in your mind by quoting Dr. Alex Elder's book TRADING FOR A LIVING (page 75), "A ball hits the floor and bounces. It drops after it hits the ceiling. Support and resistance is like a floor and a ceiling, with prices sandwiched between them." SUPPORT and RESISTANCE In many instances you will find that a stock's price has fallen to a level where demand at that price increases and buyers begin to buy. This creates a "floor" or SUPPORT level. In contrast, you will find instances where a stock's price rises to a level where demand decreases and owners begin to sell. This is the "ceiling" or RESISTANCE level. Why? Because investors and traders (people!) have memories. Those that follow a particular stock just "know" that it "never falls below xx" and it "never rises above xx". The "floor" and the "ceiling" are not fixed barriers you can touch, rather they are a psychological barriers. Consider the fact that there may be a number of traders who bought the stock at the "ceiling" who are grateful to be able to get out of their positions and just break even. They were beating themselves over the head from the day they bought it, swearing they will never be so "stupid" again, and praying that they can just get out without losing their shorts. HOW TO RECOGNIZE SUPPORT AND RESISTANCE Support and Resistance levels can usually be identified by studying a chart. To find either of these levels, look for a series of low points (support) or high points (resistance) that the stock moves within. The Abercrombie & Fitch Co. (ANF) chart is an excellent example to start with. Click on the following link and view its chart: bigcharts.com Concentrate on the left side of the chart, from the beginning of March to the end of September 1998. Can you see the support (40ish level) and the resistance (50ish level)? . Now look at the right side of the chart and see if you can find the support and resistance. (You may want to look at the one month chart so that you can see the price movement more accurately.) What support and resistance levels were established during this period? (See the answer at the end of this newsletter.) How does the strength of these levels compare to the support and resistance levels of 1998? STRENGTH OF SUPPORT OR RESISTANCE In the case of ANF, the support and resistance are obvious due to the frequent number of times the price bounced between the two levels. This is an indication of strong support and resistance. Remember, the more historical pattern there is the more the investors "know" and the more confident they can be in forecasting the future behavior of the stock. USING SUPPORT AND RESISTANCE Many investors will set a stop (remember those?) slightly below 40, while those that had sold ANF short in anticipation of buying it back at a lower price, will set a stop slightly above 50. The reason for these stop levels is because investors "know" that historically these price points are unlikely to be violated. When either of these points are exceeded to the point that stops go into effect, then there is the potential for a significant price move as automatic buying or selling is set to motion by the stops. TRADING RANGES A long-term pattern of a security's price bouncing between support and resistance levels is called a trading range. Though most charts don't have a predictable pattern such as this, one strategy to use if you find such a stock is to play within the trading range., This strategy could have been repeated several times by buying ANF around 40-41 and selling around 48-50. Sometimes called "channeling" or "rolling stock," it is a tactic many traders will employ. Realize that a long-term "buy and hold" investor would have sat on an investment that, for all practical purposes, hadn't moved for six months, while a "channel surfer" would have made a decent return by buying near the bottom of the pattern and selling near the top. Take a look at Wells Fargo Company (WFC): quote.yahoo.com Notice that you could have bought the stock at 35 and sold it at about 40 four times. A buy and hold strategy during that period would have realized only about 3 points of price appreciation. BREAKOUTS Let's look again at the ANF chart and focus on the right hand side of the chart disregarding the month of October 1998 when the market crashed due to the Russian financial crisis. Wow! The stock traded in a 10-point range for seven months and then BOOM! What happened? Recall that the more times a stock hits a support or resistance level the more apparent or "stronger" that level becomes. Well, being astute investors we just "know" that the price is unlikely to exceed 50. The more of us that recognize that fact the more short sellers there are likely to be. And the more short sellers there are the more stops will be set at that "unlikely" level. But, oops! ANF invents a "never have to wash" pair of jeans that every mother wants their teenager to have. The result? Demand for the stock goes up, short sellers are "squeezed" out (short squeeze,) and everyone that thought they "knew" where the "ceiling" (resistance) was no longer has an investment in that stock. What once was the "ceiling" has now become a new "floor" or support level. Now look at the right hand side of the chart and notice that it isn't clear yet where the ceiling will be. This makes it so short sellers are less likely to step in. They no longer can anticipate where the stock is likely to "bounce back down". This is referred to as "blue sky territory" or a "blue sky breakout." FALLOUTS Just like SUPPORT can be considered the opposite of RESISTANCE, the positive phenomenon just described as a BREAKOUT can occur in a negative manner. This is what I will refer to as a FALLOUT. To depict this let's move on to another chart, Walt Disney Company (DIS) by clicking on the following link. bigcharts.com The left-hand side of the chart (March - July 1998) is somewhat similar to the ANF chart in that the stock is trading in a range 35-40. Now turn your attention to when the support level of 35 was broken. For the month of August 1998 the old support level became the resistance for just a short time and from there until early October the stock was searching for the bottom until if finally found one in mid September 1998. Above and beyond any negative news, what contributed to this FALLOUT was the fact that investors who "knew" the price of DIS was unlikely to fall below 35 had stops set at 33-34. Then when the price penetrated this level, for whatever reason, everyone that thought they "knew" where the "floor" (support) was no longer had investment in the stock! 50-DMA SUPPORT LEVEL Before wrapping up this discussion, I want to draw your attention to the fact that many technical analysis packages are programmed with 50-DMA (Daily Moving Average)rebounds in mind. Especially on strong stocks. Though the behavior of each stock is unique, often you will see that as a stock nears the 50-DMA, buyers come in and reverse the downtrend. An excellent example of this phenomenon is to view a chart on DELL. Click on the following link to view Dell's chart with a 50-DMA: quote.yahoo.com The 50-DMA is the orange line. Note how the 50-DMA "supports" the upward trend. On a few occasions DELL dipped below the 50-DMA, however this particular stock has a very predictable pattern, and the price quickly reversed within a week. You won't necessarily find this same pattern among many stocks. But when it is found, it can be quite valuable. Just as in the case where traders "know" the trading range of a stock that is stuck between a lateral support and resistance level (trading range or channel), they will also look to the 50-DMA to provide an indication of support as a result of pre-programmed technical analysis packages. ****************************** ANSWER TO ANF QUESTION Support at about 70 and resistance between 78 and 80. ******************************** Understanding the concept of support, resistance, trading ranges, breakouts and fallouts can be quite valuable to both traders and long term investors. Again, it is not a tool to be used in isolation, but when used with other indicators it can be very useful in deciding whether and/or when to invest in a position and can serve as an appropriate stop level for those with a short term investment perspective.