Monday, September 24, 2012

Heading Towards Resistance

MetaStock SPRS Series - Week 87 - TechniTrader® Stock Discussion for MetaStock Users - Heading Towards Resistance - September 24, 2012
By: Martha Stokes C.M.T.

One of the dilemmas that a retail trader faces is holding a stock as it heads toward resistance. The questions always arise, will the stock retrace, correct, or move sideways?

Where a stock stops, the volume patterns, flow of funds, and consistency of quiet accumulation help determine what the stock will do next.

IBM is at a point where it has run up nicely on a swing style run and is at a resistance level. The resistance above its current price, is all time high resistance from earlier this year.

The questions most traders have are whether this is the end of the run, OR will IBM move up beyond that all time high to form a new high.

Chart 1

Volume is stronger to the upside and weaker to the downside, indicating that the selling is profit taking on a light mode. The pattern is a consolidation and the stock is holding to the weak support lows.

The TechniTrader® Volume Accumulation TTVA indicator in the middle chart window, is dipping slightly down as is normal for a profit taking phase. The TechniTrader® Flow of Funds TTFF indicator in the bottom chart window, is not extreme and has risen as the stock has moved up.

All volume indicators point to strength. The bottoming pattern is a short term inverse H&S, which can be a strong bottom formation especially on a short term. Prior consolidations are offering support also for fundamentalists considering this stock.

Remember there are 2 major factions in the stock market:

  1. The fundamentalists that account for 70% or more of the market action. These are the funds and institutions, both sell side and buy side market participants. They are searching for what they consider “bargains” based on future growth of the company.
  2. Technical Trades who use stock charts to determine a good entry.
Often retail traders totally forget about the fundamentalists or consider them unimportant. However since they dominate the market being aware of their activity is important. How and when they are buying helps you understand what the technical patterns are telling you or are revealing.

To be an excellent chart reader you must be aware of the fundamentalist component and use indicators that not only evaluate price but also evaluate quantity, as it is in quantity indicators that fundamentalist activity is best displayed on the chart.

Chart 2

IBM has been moving up steadily for some time but is not at market saturation. Rather it is building a foundation for new technology and growth. The recent sideways trading range pattern for IBM was due to the heavy acquisition mode it has been in for over a year now.

The TechniTrader® Quiet Accumulation TTQA indicator in the bottom chart window, shows that even during the trading range period the buy side institutions held.

When looking at a chart you must always ask yourself, “Who is in control of price?” Which of the 9 market participants control price at this level? What is their intent for buying or selling? How do they affect price action near term?

When you have the answers to these questions determining whether a stock is topping or simply correcting, or bottoming and preparing for the next stock value increase becomes easier.

Technical patterns can tell a retail trader far more than most traders realize. By understanding the driving force behind the different patterns, you will have a far better analysis of what the stock will do next.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock Partner

©2012 Decisions Unlimited, Inc.

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