How To Buy – insider guide to making money in stock market [PDF]

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How To Buy – insider guide to making money in stock market Book

This rectangular formation then became the important support level. Others would cite support as 37-40, since that encompasses the entire prior trading range. To us, however, the meaningful support is 39 1/2—40. For support to be proven favorable, the top of the support area must hold. Otherwise, our rule of ‘‘going too far”’ comes into effect. If the stock is truly bullish for a longer-term move, it must succeed during all tests.

A correction is such a test. Accordingly, either it holds the top of the support area—because it is a good stock—or it dives down “‘too far’ into support, telling us that the selling pressure was too strong or the buying too weak, telling us, in any event, that the stock isn’t as rosy as it had previously seemed. A stock that goes too far into its support zone is providing its first warning sign of potential trouble. In this instance, CQ held perfectly, right at the top of support (C), just as it had held perfectly during the rectangular formation above its longer-term moving-average line.

Indeed, on the next wave of selling, it also held perfectly (D), reaching a low that was slightly better than the previous low at C. The slightly higher lows and slightly lower highs during this period of wild swings created another triangle formation. The mild dip on extremely low volume at E provided a tip-off that the breakout from the triangle would be up, as indeed it was, for another rally. (This action at E is a good example of why and when a trader can risk anticipating an upside breakout.)