The stock market moves by how investors react to events (E.g company expansion, laws passed by the government, security threat etc..) though it's reasonable to follow what most people are doing, it's better to understand the market in a big picture. Since stocks move in cycles, technical analysis will help you decide when to ride the wave or get out.
SUPPORT AND RESISTANCE
The stock market follows the principles of supply and demand, the more people wants a stock the higher it moves up, the more people selling it, the cheaper it gets. So when a stock goes down in value, it doesn't mean the stock is cheap, rather the majority of investors think it is. When investors think that the price is too cheap to ignore, they buy again, making the price go up. This is the cycle that happens repeatedly, it should look like this in a graph.
Example A.
As you can see in the graph, the stock drops every time it reaches 2 pesos per share; that's resistance, that's the time investors think it's too expensive and they sell, when it goes back down to 1 peso, it bounces back up. The support is 1 peso.
The support price where most buying happens. Technical analysis, has nothing to do with value and everything that has to do with price and quick gains.
How do you get the support and resistance?
That's easy, all you have to is draw a straight horizontal line where you see the most uptrend to find the resistance, the same process in marking the support. Like in Picture B.
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| Picture B |
The longer cycle, the more likely it is to continue its pattern. So the idea is to buy the stock close to the support, which in Picture A show 1 peso. So make it a habit to buy at the support level, since where most likely the buyers are.
BREAKOUT
After the repeated cycle, when the stock exceeds its support, there's what you call a breakout. This means investors think that buying at the support level is still cheap. It should look like this in Picture C.
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| Picture C-Breakout |
BREAKDOWN
On the other hand breakdown happens when there are too many sellers, it's the opposite of a breakout.
If breakouts bring prices higher,a breakdown takes the stock to a new low. See Picture D.
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| Picture D |
What to do with breakouts and breakdowns?
It really depends on what kind of investor you are. For aggressive investors, they would immediately buy as soon as there's a new breakout, other's would wait until there's a new resistance before they buy. However, be careful though when buying when there are breakdowns, especially if you're new in investing, because nobody knows where the bottom is (there's what you call an upside, which I won't be covering in this article). I suggest you wait for it to go back to its original resistance before buying the stock or at least know where the new resistance is before buying the stock.
CAUTION: Technical analysis is not a full-proof way to predict whether the stock will do well or not, however, it will give a glimpse on how well it will perform in the short term.
With this information at hand, you can analyze and buy your stock more effectively.
Thanks for reading, I hope this article helped. Please hit the like button and share, so you'd be a blessing to others too!
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