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not be surprised that a free-fall ensues when the stock breaks through its initial support level. |
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Long-term investors need to have this rudimentary information in helping them understand why a stock is falling so fast. Then they need not panic and end up selling at the bottom, which is often the second or third level of support. |
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Conversely, the concept of resistance is simply that a stock will tend to rise to a certain point and then have trouble breaking through a specific number. Some stocks will sit at their resistance point for days or even weeks or months before they break out and head higher. And sometimes they never will make it past a certain point, no matter how long you wait. You can watch it come right up to the number and then fall back; this will happen repeatedly, and when it does, it is viewed as the resistance point. |
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This, too, can be useful information for deciding a possible exit point. At the least, you have an idea why the stock refuses to go any higher when it hits this point. Although for those who do technical analysis the concepts of support and resistance are taken as a truism, large numbers of online investors do not know of them. |
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Sometimes these resistance points are whole numbers that mark a new decade, like 20, 30, or 40. This is why you see smart traders put in sell orders for something like 29 7/8 rather than 30. They know it is tougher to push the stock to the next whole number and they also know that less sophisticated investors are thinking in terms of whole and half numbers. Because there are more of them waiting in line to sell at this round price, let's say 30, they know it will be easier to hit the bid price of 29 7/8 or 29 13/16 than the round number. So, basically, you decide to cut in line in front of everyone waiting for 30. |
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You can easily verify this by watching the movement of a stock on Level I dynamic, updating quotes. Sometimes the price will hang around the whole number a long time, just under it, before breaking through. I have seen times when the price never has enough steam to break through. This can be viewed as a "miniresistance" and is often controlled, at least to some extent, by market makers. Of course, when the pressure of buy orders pushes the stock up, the market makers step out of the way and let it run its course. |
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A stock's resistance point is important to know for another reason. When you see a stock break out sharply above the resistance point, you don't want to be in a hurry to sell it, as it needs to be given some latitude to find the new resistance. When you watch quotes on |
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