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Thursday November 20, 2008 |
Support
and Resistance in a Downtrend
Remember, the
relationship between price and time is linear so investors that buy
stocks "wrong" are first motivated to sell the position
without suffering a loss but as days become weeks and weeks become
months a rationalization process occurs that allows these same
investors to sell their position for a loss. Of course they
want to get the best price possible so they watch the price action
very carefully, noting what price points lead to buying and what
price points lead to selling. We understand that these price
points are not random, they are support and
resistance.
In the case of active sport and
footwear maker Timberland Co. (TBL) support and resistance price
points are obvious. After a lengthy run to new highs,
Timberland fell out of favor in a weak retailing environment.
In January of 2001 the stock made a new high above $72 but by
February the share price was falling fast. In early February
Timberland shares fell to $59.50 and rebounded to $66 just a few
days later. This $59.50 level became the first major support
level of the new downtrend. By late February the $59.50
support level had been smashed and a relative new low was made at
$51.50. This time buyers "dug-in" and the stock
rallied smartly only to find sellers at what had been the previous
support level at $59.50. Of course, this level was now
resistance. Through most of the next three weeks the stock
meandered near the support level at $51.50 until that level was
broken in early April. After falling as low as $42,
Timberland shares made several attempts to rally back through the
$51.50 resistance level but every attempt was rebuffed. As
the series of green support and red resistance arrows reveal, this
stair-step pattern created a very well-defined technical
downtrend. Note how sellers become willing to sell their shares
for successively less as time passes. This may occur due to a
change in fundamental factors but the result is a stair-step
pattern of support and resistance.
Now that we have
mastered support and resistance in a downtrend let's tackle
uptrends.
support
and resistance in a flat base 
support and resistance in an
uptrend
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