Now that GOOG is IBD #1 is it time for you to short the stock? I don't know if investors really take IBD rankings that seriously (I hope not). Was Friday's trading of CUTR an abberation, or a sign of things to come?
I believe there are way too many shorts in the market and they have been making good dough for a long time. However, the market is going to correct the other way, and probably overcorrect (It usually does). This means a powerful bull market for the first 1/2 of 2006. This means that PE of growth stocks will not have as much meaning as they normally would.
Looking at the chart, CUTR looks like a good short play. This stock has gone up quite a bit in the past few months and is due for a pullback. Will the pullback be significant enough for shorts to make money? Or will the pullback be a hiccup on the way to $50, $60, $70?
I think that CMED and HLEX are better short plays!
The fact that these basic patterns can be seen on a chart does not predict that the stock price will repeat them, what ever form they take. They do allow you to be prepared to act if they do resurface or come into play.
TA is not, I repeat not, used to decide which companies I want to own stock in. FA of the industry and specific stocks is used to determine the prime candidates for buying/selling. TA is used to �assist� in determining when the buy or sell shares or when to open or close an option position against (or to get) those shares. Like Buffet, I make a significant amount of my proceeds (the spendable kind) via the selling of derivatives against my holdings (whether in the form of shares or cash).
A basic premise behind how/why significance is given to support and resistance is based partly on human nature. Many that buy a stock at 42 and then see the price drop to 32 will be tempted to sell this dog when it gets back close to 42. They become part of what is known as �overhead supply� or resistance. Those that bought at 32 and then sold at 42 will be looking for another chance to buy near 32, especially if the fundamentals have not changed or have improved since they sold. They will want to ride this moneymaker again, and therefore create support at this price. Those that bought at 24 and sold at 32 only to see the stock move higher to 42 will be looking to buy back in if the price retreats back toward 32. Again, especially if the fundamentals have improved since they sold. They�re not going to miss the next ride up.
Often there can be a decent amount of trading at certain price points. There is a build up of emotional attachments being created at these points. Once the price moves away from these areas they tend to come back into play if the price later revisits these price/trading zones. There are investment strategies whereby people will place specific stop losses to maintain preservation of capital. IBD recommends 8% under what you pay for a stock. These can create selling if there was a reasonable amount of trading (days and/or volume) at a particular price/zone and the stock drops from it by a significant enough amount to trigger the stop losses.
A positive change in the fundamental equation can and often does propel a stock above the current highest resistance point. Sometimes the price needing to catch up with the in place fundamentals can cause this breach; especially if it has been trading sideways for awhile waiting on confirmation that the picture remains sound. The growth remains intact. Eventually enough shareholders will desire to book profits that profit-taking halts the advance. It can then reverse (too far too fast) or trade sideways until further confirmation is received (the advance above resistance was moderate and reasonable).
Had to attend a funeral today and a viewing this evening or I would have come back with what follows sooner.
I will take a shot at trying to explain my basic uses of TA. First off I must outline what I mean by TA; it is the use of charts to assist me in determining or verifying good entry or exit points for buying/selling shares or options. It is used to verify the price points and to a certain extent the timing of these moves.
The tools I tend to use the most often to accomplish this are trend lines and support/resistance points; often used in combination. What the charts of others in the niche/industry look like also plays a part. Sometimes the MACD, Stochastic Slow or some other indicator may be viewed to get an added sense as well, but they are not primary tools to/for me. Overall market and sector trends are taken into consideration as well as seasonal trends.
While my methods are fairly simple they do not entail testable and repeatable TA algorithms.
We will use a chart of ELOS for an example. Please find the starting chart linked below. While I already have horizontal lines placed at 42.50 and 33, you will need to add a few additional lines to what will come up when clicking on this link. To add these lines you will need to click on the highlighted word �annotate�, just under May on the time line scale. Hopefully I can properly explain how the place these additional lines. After hitting �annotate� the chart that gets loaded (can take awhile) with come up with a cross-hair cursor already blinking. It is pre-set for placing trend lines. ELOS has been in a basic up slopping trading pattern, so we will start by placing a lower trend line (buy line).
On the left side of the chart, in early January, you will see a long red candle that closed at about 23. Place the cross hair at the bottom of that red candle (at 23). With the right button of the mouse held down, drag the cursor up and across the screen to the intersection of the line I placed at 33 and the �price line scale� on the right of the chart, release the button. To place the upper trend line (sell line) of the basic trading range we will repeat the process. This time we start at the top of the first candle on the extreme left side of the chart (at 30 price), and take it to the intersection of the line I placed at 42.5 and the price line scale. You will note that these lines generally follow the higher lows and higher highs that have been put in.
We have completed placing trend lines, but need to add two more �horizontal lines� to the ones already at 42.5 and 33. We want to add a line at 31 and another at 40. You will note a selection of icons across the top of the basic chart. The third one from the left is the �horizontal line tool�. To change the cursor from the trend line tool to the horizontal line tool we need to click on the �selection tool� icon/button (extreme left) and then on the horizontal line tool. Do that and then place a line at 40. To place another line you must again click on the horizontal line tool icon; do that and place the next line at 31. We�re done
40 to 42.5 represents the current resistance zone that the price must break. While there is �support� down to and at 35, if that gets breached the stock price should fall to 33 or lower. 31 to 33 represents the second support zone (the screaming buy zone), and is close to the lower trend line. There is an adage that says resistance that gets broken later becomes support. 31 and 33 were resistance points months ago and recently were tested as support and held.