I wish to continue the discussion on price and volume today since this is very important to all investing. The focus this time will be support and resistance. It was mentioned in the previous blog that you should only buy high volume breakouts. A breakout is the price going above the previous high. Often you will see stocks attempt to break out to new highs but fail and fall back. Often a high level channel will form where the price just cannot break out. If the price does eventually break out to a new high above the old price it has to be suspect unless it breaks out on volume. Often a breakout will fail to only fall back into the channel and continue that high level channel. Look at the chart below of stock symbol COO courtesy of http://www.bigcharts.com/ illustrated again is price and volume but over 6 months.
The reader can note that mid November shows a high level channel where the price is hovering around $32 for about two weeks. Notice how after one week it tried to break out to the up side but failed. Eventually it broke out on at least double the volume and rose to $34 before a new consolidation set in again for about 2 weeks. Another break out occurred to $38 in early December. To date a couple of attempts to further break out have failed. If you were considering buying this stock (or adding more if you own it), then wait to see the price moves above $39 on high volume (without the volume it could easily fall back into the channel). Of course when you add to the position here you will then calculate your new break even point and raise your stop accordingly. The reader must realize that stock investing is an art and not a science, even after all this preparation a stock can still fail at any time. The point has to be that it’s an “odds favor” situation that may or may not work to your advantage. You must approach the market from a statistical point of view. You will have many losers with a loss of $10 as you get stopped out on the initial purchase but hopefully as you find your winners and add to them they will far outweigh the small losses. Remember you don’t want a whole string of stocks that have not yet met their break even point, just buy one or two and when they get to break even buy other stocks.
Let’s discuss the psychology of the price channel at a high. Imagine investors bought the stock close to $39 and it falls back. Many people will get nervous because they own a large block at $39. Often those investors will sell as soon as it gets back to their buying price. They will sell it and be relieved that they got out without losing money. This is a resistance level and the stock has to overcome those sellers before it can move higher. Once the stock gets above $39 every single stock holder is in profit and feeling happy about their investment. Typically as the stock breaks out you will see a rapid rise up to some new level as we have seen on this stock the previous weeks. It will then consolidate at some point as it appears expensive and at some point the nervous sellers will return. As long as the selling is on low volume you should sit tight. Very soon the stock will find its new level and start moving sideways again to form a new high level channel, since anyone that wanted to sell will have sold and new buyers won’t appear until it starts moving up again. This is the dull low volume price action that should not be bought or sold. The next high volume move will tell you the new direction of the stock. Nervous sellers will be indicated by a low volume sell but if the insiders start selling the tell tale sign will be a high volume fall telling you the game is over and you should sell some if not all your holding.
On a final note when a stock falls and settles down in a low level channel that is called support. It means every time the sellers take it down to that level then buyers return because it looks so cheap, that is called the support level.
To summarize stocks move up and consolidate into resistance channels or stocks move down and consolidate into support channels. Let the stock show its hand by moving out of that channel on high volume up or down before you make your next buy or sell decision.
No comments:
Post a Comment