Trading stocks education - Trading tactics & examples
Support and Resistance in a Downtrend
The relationship between price and time is linear so investors that buy stocks "wrong" are first motivated to sell the position without suffering a loss but as days become weeks and weeks become months a rationalization process occurs that allows these same investors to sell their position for a loss. Of course they want to get the best price possible so they watch the price action very carefully, noting what price points lead to buying and what price points lead to selling. We understand that these price points are not random, they are support and resistance.
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In the case of active sport and footwear maker Timberland Co. (TBL) support and resistance price points are obvious. After a lengthy run to new highs, Timberland fell out of favor in a weak retailing environment. In January of 2001 the stock made a new high above $72 but by February the share price was falling fast. In early February Timberland shares fell to $59.50 and rebounded to $66 just a few days later. This $59.50 level became the first major support level of the new downtrend. By late February the $59.50 support level had been smashed and a relative new low was made at $51.50. This time buyers "dug-in" and the stock rallied smartly only to find sellers at what had been the previous support level at $59.50. Of course, this level was now resistance. Through most of the next three weeks the stock meandered near the support level at $51.50 until that level was broken in early April. After falling as low as $42, Timberland shares made several attempts to rally back through the $51.50 resistance level but every attempt was rebuffed. As the series of green support and red resistance arrows reveal, this stair-step pattern created a very well-defined technical downtrend. Note how sellers become willing to sell their shares for successively less as time passes. This may occur due to a change in fundamental factors but the result is a stair-step pattern of support and resistance.
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