Friday, July 11, 2008 11:33:23 PM
STAGE 1: THE BASING AREA (see post this is linked to)
After stock XYZ has been declining for several months, it eventually will lose downside momentum and start to trend sideways. What's actually taking place is that buyers and sellers are starting to move into equilibrium, whereas previously the sellers were far stronger, which is why the stock had plummeted. Volume will usu- ally lessen-dry up-as a base forms. But often volume will start to expand late in Stage 1, even though prices remain little changed. This is an indication that dumping of the stock by disgruntled own- ers is no longer driving down the price. The buyers who are moving in to take the stock off their hands are not demanding any significant price concession. This is a favorable indication.
Here's how it appears on the chart. Initially the 30-week MA loses its downside slope and starts to flatten out. In addition, intermittent rallies and declines will toss the stock above and below the MA. During this stage, there will usually be several swings between support at the bottom of the trading range and resistance at the top of the range. This basing action can go on for months or, in some cases, years. This is the point where many market players get itchy to move in and catch the bottom price. But it doesn't do much good to buy yet. Even if you catch the exact low, your money could be tied up for a long time with little movement, and time is money. Even worse, premature investors often get impatient and end up selling after months of frustrating sideways action right before the big move starts. Now study Chart 2-2-Bethlehem Steel, which is in Stage 1 (shaded area).
Note that after dropping sharply from 22 to 45/8, it finally managed to rally up to and then above the MA. The next decline took it slightly back below the MA, and then the next rally (on increasing volume) saw BS break above its horizontal trendline as the MA started edging higher. Once BS moved above 93/8, it was now ready for a Stage 2 advance, and it quickly soared to 171/4 over the next several weeks.
Enroll in Wealth University today!
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After stock XYZ has been declining for several months, it eventually will lose downside momentum and start to trend sideways. What's actually taking place is that buyers and sellers are starting to move into equilibrium, whereas previously the sellers were far stronger, which is why the stock had plummeted. Volume will usu- ally lessen-dry up-as a base forms. But often volume will start to expand late in Stage 1, even though prices remain little changed. This is an indication that dumping of the stock by disgruntled own- ers is no longer driving down the price. The buyers who are moving in to take the stock off their hands are not demanding any significant price concession. This is a favorable indication.
Here's how it appears on the chart. Initially the 30-week MA loses its downside slope and starts to flatten out. In addition, intermittent rallies and declines will toss the stock above and below the MA. During this stage, there will usually be several swings between support at the bottom of the trading range and resistance at the top of the range. This basing action can go on for months or, in some cases, years. This is the point where many market players get itchy to move in and catch the bottom price. But it doesn't do much good to buy yet. Even if you catch the exact low, your money could be tied up for a long time with little movement, and time is money. Even worse, premature investors often get impatient and end up selling after months of frustrating sideways action right before the big move starts. Now study Chart 2-2-Bethlehem Steel, which is in Stage 1 (shaded area).
Note that after dropping sharply from 22 to 45/8, it finally managed to rally up to and then above the MA. The next decline took it slightly back below the MA, and then the next rally (on increasing volume) saw BS break above its horizontal trendline as the MA started edging higher. Once BS moved above 93/8, it was now ready for a Stage 2 advance, and it quickly soared to 171/4 over the next several weeks.
Enroll in Wealth University today!
#board-10933
Enroll in Wealth University today!
#board-10933
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