A Lesson On Weak Resistance Levels From eBay

August 16, 2001
Eddie Kwong

As you know, there
are more buyers of a stock than sellers at the support level. In other words,
buyers outnumber sellers, and traders and investors love to buy a stock as soon
as it bounces from its support level. But once the support level is broken, it
will become the resistance level. It is just like a good friend is turning into
your enemy. In general, after the support level has been violated, the stock
will try to pull back to the breakdown point. The chart below is a daily chart
of eBay Inc. (EBAY)
as of the close on August 15, 2001. As you can see, it has a lower support level
near 58.50 and the upper support around 59.50.

Now, let’s take a look at the five-minute
chart of EBAY from today’s session. It clearly shows how the stock bounced down
when it touched or came near the lines. But as you can see, those two lines were
not tough enough to be resistance. Why did they fail to become strong resistance
levels? One obvious answer is that the stock began to exhibit the signs of the
uptrend after hitting the low shortly after the open. Look how EBAY started to
record higher lows and higher highs.