Forum Archive Index - October 2001

[Phaedrus <Phaedrus@techemail.com>]

Rod,
     You are on to it. If EBO closed in or above the green circle, it would 
mean :-
(1) A new uptrend had begun.
(2) The crucial resistance level of 265 had been broken.
  There would be a new uptrend because there would be a new high at D, higher 
than the previous high at B, after a low at C which was higher than the 
previous low at A. Higher high after a higher low.
  EBO had shown historical support at 265. As often happens when a support 
level is broken, it became resistance. Five or six times this level was tested, 
without a breakthrough. Technically, this was make or break time for EBO. Look 
what happened the next time this level was tested - prices went through the 
resistance level as though it wasn't there. This was the breakout. The crucial 
265 level should now act as support. This is exactly what happened at E. There 
had been clear resistance at 305. Went through that like a dose of salts. The 
bulls were driving all before them.
  Why should we watch for breakouts in situations like this? Let's examine the 
dynamics involved. Say you are a keen seller. ("I bought this absolute dog of a 
stock in 1996 at 270. As soon as it gets  back to that again, I am out of 
there") So you place a sell order at 270. You notice prices rising to 265 and 
then falling away. You want out, so you (and any other keen sellers) reduce 
your asking price to 268. No sale. 267. No sale. 266. You finally capitulate 
and sell at 265, just glad to be out. This has the effect of creating a sort of 
partial vacuum just above the resistance level. An area where there are fewer 
sellers. The longer the resistance level holds, the wider (deeper) this band 
is. This can easily be seen if you have access to market depth information. I 
see it in my minds eye as a sort of "deprivation zone" when I see a chart 
pattern like this. Some people call a situation like this an explosion waiting 
to happen. Any great buying pressure would overwhelm the few sellers, and 
prices would accordingly jump sharply. 
  Buying in the green circle is buying at the lowest risk entry point. Buying 
before this (at the trendline break for example) or after this (later in the 
uptrend) would carry more risk.
  One technique that could be used to catch breakouts like this would be to 
place a Stop/Buy order at say 270. If a breakout occurs, when prices reach 270 
your order is activated. No breakout, no buy. Not all brokers offer this 
facility.

         Phaedrus.

Geoff, you forfeit forever the privilege of asking for multiple charts!

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