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Technical Analysis Simplified
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Support
and Resistance in an Uptrend
Although
the motivation is not the same, many of the same forces that lead
to technical downtrends are also at work in the creation of the technical
uptrend. These patterns occur because investors
chasing a strong stock rationalize that paying a higher than their
intended purchase price is warranted given the strength of the
issue. The higher the stock price moves, the more likely it
is that investors will rationalize why paying a higher price makes
sense -- to a point. Some will argue this rationalization process is
directly related to a perceived change in fundamental factors and
very often this is true. Understanding technical analysis
does not mean that fundamental factors should be dismissed.
Consider the case of SLM Holding Corp. (SLM), a leading lender to
students.
SLM Holding Corp. was one of
the few issues to move significantly higher in the latter half of 2000.
The stock emerged from a small base pattern in the middle of September at $45
and never really looked back. When this level was penetrated on better
than average volume it became important technical support and buyers were more
than willing to step-up and buy on every decline to that level. In early
October SLM Holding tested support at $45 on three separate occasions.
In each case the stock rallied briskly and after one such test in the middle
of October SLM Holding began to trend so strongly that the stock nearly added
30-percent in just two weeks. That process lifted the stock to a new
resistance point at $59. SLM Holding failed to push through the $59
level on two occasions but in early December volume surged and the share price
easily moved beyond $59. Once again the result of the upside breakout
was a significant near term rally. This time the stock rallied to $68.50
before sellers emerged. We have delineated the key support and
resistance levels with green and red arrow respectively. These arrows
reveal just how powerful is the role of support and resistance in the
formation of a typical technical uptrend.
Conclusion
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Support and
resistance are price points where buyers and sellers have
shown a willingness to buy and sell stock.
-
When support
falters it becomes resistance. When resistance is
eclipsed it becomes support. This occurs because weak hands
(non-believers) are replaced with strong hands (believers).
-
Support and
resistance play key roles in the determination of major trends
creating "stair-step" levels where both buyers and
sellers have shown a willingness to act.
O.K, we are through with the easy stuff, now
it is time to pull it all together with the last basic
concept, the importance of volume.
support
and resistance in a downtrend
the importance of volume
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