The Complete Guide to Investing in Gold and Precious Metals: How to Earn High Rates of Return Safely by Northcott Alan

Author:Northcott, Alan [Northcott, Alan]
Language: eng
Format: azw3, epub
Tags: gold, diversifying investments, investing, alternate investments, precious metal, complete investing guide, porfolio
Publisher: Atlantic Publishing Group
Published: 2012-07-16T16:00:00+00:00

Here is a chart of ev3 Inc., which manufactures medical products, demonstrating sideways movement since the end of July. You can see that support is at 11.5, which the price has touched twice, and resistance is at 13.0 — the top of the chart, also recognized as the ceiling — which has been touched several times and is firmly established. Note that the slight overshoot on July 28 is not significant, as this is not an exact science.

The fact that you can identify support and resistance on a chart does not mean that these values are immutable. The market will do what it wants to do, and sometimes the price will keep going up past resistance to set new highs. When this happens, it is called a breakout, as the price is breaking out of the restricted range it has been trading in.

A curious occurrence, which has been frequently observed and is therefore a principal of technical analysis, is that after a breakout, the previous resistance becomes a support level. (If the breakout was downward, the support becomes resistance). The chart above demonstrates the principle, although the values are not exact. You can see there was a resistance level slightly above 11 in June and July, followed by a breakout on August 28. The new support level of 11.5 is just above the previous resistance.

There is an explanation for this in terms of the psychology of the market. Traders who did not buy while the stock was in the lower range may be regretting missing the opportunity. When the price comes down close to the range again, a number of them will be determined not to miss out again and decide to buy, which pushes up the demand and establishes the new support level.

The next step in discussing trading principles is the trend line. Remember, stock prices do not trend all the time, and when they are bouncing between the support and resistance lines, they are going sideways. But when a stock is in a trend, it is possible to draw a trendline that is sloping, and which represents an angled support or resistance line.

If a stock is in an uptrend, then the line will slope upward. You can draw it by connecting two or more low points on a price chart. It does not always work out, and there are some price charts with an upward trend that do not have a suitable position for a trendline. If you draw a trendline on the basis of two points, and a third low point touches it and bounces off, the trendline is considered confirmed and more reliable. As long as the stock price stays above the rising trendline, which is a support line, the trend is valid and can be traded on. If the price drops below, this is the same as a breakout downward and may signal the end of the trend.

If a stock is in a downtrend, the trend line will be drawn over the top of the prices and will represent a resistance line.

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