Support From The Past In BBH

  • July 5, 2000
  • TradingMarkets Editors

One of the first things I do when assessing a
stock’s technical health is to look at where its price action stands in relation
to potential support and resistance. 

  • Support defines a price level where the equilibrium between buyers and
    sellers favors the buyers. A stock would tend to bounce up from such a
    level.

  • Resistance refers to a price level where the equilibrium between buyers
    and sellers favors the sellers. A stock would tend to bounce down from such
    a level.

There is nothing magical about support and resistance and it would be wrong
to view them as being predictive enough for you to trade off alone. The fact is
that most professional traders who study charts, do so partly to become aware
of potential support and resistance levels. These are the levels they’ll be
especially focused on as they look for tradable patterns to form.

Support and resistance can anticipated off the following types of technicals:

  • Breakout levels

  • Classical chart patterns

  • Price levels from which price action has bounced in the past

  • Moving averages

  • Fibonacci retracements

Today, I came across an unusual example that reminded me of a discussion that
Dave Baker and I had a few weeks ago. Dave loves to draw lines on charts, as do
I. One of his less-than-conventional approaches is to view a price level that
was important in the distant past as being potentially important in the future
even if that price level was ignored by the market recently.  An example of
this occurred today in the Biotech HLDRS
(
BBH |
Quote |
Chart |
News |
PowerRating). We posted the following in TradersWire:

12:04:37



The Biotech HLDRS (BBH)
is breaking out from a nine-day trading range. Volume is 70% of average
and you may want to see if it hits 100% before 1:00 PM ET. Worth noting:
Recent support levels from which the BBH catapulted to breakouts matched those
of biotech’s January and February glory days.

I would venture to guess that the typical trader would not have
noticed that the BBH has recently been bouncing from support levels that were
important four months ago. A trader who was aware of this might have had all the
more reason to be on the alert for the two breakouts we’ve seen in June and July
respectively.

See you tomorrow,

Eddie