Dear Don, [9-12-00]

It was interesting to note that some of the recent Worden Reports featured discussions on my favorite basics; volume, trendlines (Squire Trendtrader), and MA's (Sir Example and Sir Smoothcharts). There is one more important basic which should be mentioned - support and resistance levels, and I would like to contribute this brief dissertation on this subject.

Thomas A. Myers, The Technical Analysis Course, defines the two as, "Support is a price level at which there is adequate demand for a security to stop its downward price movement, and normally, turn prices upward. Resistance is a price level at which there is a significant supply of a stock causing prices to halt an upward move and, typically, turn prices down."

Steven Achelis in Technical Analysis from A to Z says, "Support levels Indicate the price where the majority of investors believe that prices will move higher and resistance levels indicate the price at which a majority of investors feel prices will move lower."

Why are support and resistance important? They can be a tremendous help when setting a buy price, a sell price, or a stop loss price. For instance, Mrs. SC from 8/17 mentioned her STJ problem. She said she bought STJ at approximately $35.00, which had to be sometime in the latter part of May. The down gap occurred on 8/16, dropping the stock to a close of $37.25 on 8/17 with a low of $35.69. I am not going to discuss why SC did not sell long before the down gap (DW did this at length), but as long as she had waited this long to sell, if she had noticed there was a strong support level at about $35.50-$35.60, she could have waited one day when the stock jumped back up to a close of $39.19. If you set the chart at daily with a log scale, zoom 5, and draw a straight horizontal trendline this can be seen graphically.

Primary resistance levels can be found the same way by drawing a horizontal trendline along the highs when you see many of them seem to stop at a certain level. Bring up ADCT, and set daily, log scale, zoom 5. Draw a horizontal trendline just a tad above the 38.06 mark ($38.50 actually).

Notice this line is BOTH a resistance level and a support level. This is an important characteristic of support and resistance. Once a security breaks through a support or resistance level, the line becomes its opposite; i.e.; if a stock breaks up through a resistance line, the line then becomes a support line.

Look at ADCT. In the first part of June the line you drew represented a resistance level, then 6/9 ADCT broke up through the line, which then became a support level. It was a good support level until 8/23, when the stock fell through its support, and the support became a resistance level. ADCT broke up briefly 8/29, but fell back again, and seems to have found more support at about $35.50.

Trendlines and MA's also can be support and resistance levels. Take a look at CGO and plot a MA13 and MA34. Notice how the MA's offer support and resistance. Plot a long-term trendline for DJ-30 from the low in October '99 to the March 2000 low. Follow the right extension to the present and go to zoom 3. Notice how many times the price has touched or approached the trendline.