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Now, I’m starting to watch, because these stocks have had a tremendous drop in price. This whole financial sector.
What do we see? We see that they have sold off dramatically. We have one lower low here. We have another one here. We have a potential other one right here. I’ve drawn this little resistance line here. Prices went through it. They dramatically went up from there. They sold back off. They went below this line again. They went dramatically back up again. They went back up to these levels here. They sold off again.
Recently, now, it looks like they haven’t dipped below this price level as deeply as they did back here. We still have a couple of days here, where it is below that resistance level. If you’re a technician, you could say, “Well, this might be a reverse head and shoulders pattern.”
It’s a little too early to tell yet. If the financial sector is starting to perk up a little bit, this is an ETF that I would be very interested in taking a look at, and doing some of the strategies that I reveal in Module 11.
Another potential new sector, believe it or not, is the home builders. The home builders have just gotten absolutely creamed, because of the subprime deal. The economy, in general, has been very rough on the home builders.
This is an ETF, XHB, on the home builders. I started drawing some of my channels. It broke through some of these channels. I have this uptrend channel going. It doesn’t appear that it’s holding, this line here. That is very significant. When it does not hold a channel like like that, and it falls below it, it shows quite a bit of weakness.
In addition, this 200-day moving average – it hovered above it a little bit. Now it has fallen below it. Until it moves back above that 200-day moving average, I may not be interested in even considering it, at this point. If it goes back down and tests this $15 level, it might get interesting again.
We try to find some clues. We try to find clues of what the next hot sector is. By listening very carefully to the news – people have mentioned home builders, and they have mentioned financial sectors. A lot of these guys will go on to a newscast like CNBC, and not really think too much about the fact that they are showing their hand about which sectors they are interested in buying.
For example, a couple of people today mentioned that Lehman Brothers looked very attractive, at this $30 level. They have had a tremendous sell off, from $80 all the way down to $30, primarily down to this whole subprime mess that the financials have been involved in lately. It has really hurt them, the whole Bear Sterns thing that happened a month ago. Now, Lehman is getting hit pretty hard.
Some people have said that this looks very attractive. I’m not so sure about that. I don’t think I would be interested in buying at these levels. I would like seeing some institutional support. Some of the institutional support that I would like to see are some black bars like this one, perhaps. I would have to see quite a few more of those to indicate that mutual funds are starting to step into this stock and support this stock.
In order for this stock to really rise in price and give us a good run-up in price, you have to see that institutional support. The way it shows up on a price chart, is simply by these large black bars, which are days in which there was more buying and selling, in significant volume.
I would take a look at a stock over a period of 3 or 4 months, and measure the number of black bars there are, on up days. I say one significant bar here, that was fairly large, compared to the days previous. There was one here, after this tremendous sell-off. Other than that, I haven’t seen anything really unusual.
In fact, today, there was a huge sell-off on the stock, of very large volume. So, I am a little bit concerned about that large volume. If it should pop back up again, and come back up to this level on very light volume, that shows that the selling has pretty much dried up on the stock. Maybe at that point, you could take a small position, according to the guidelines that I give you in Module 11.
What else do I use to determine where a stock or an index, especially for our monthly income trades – how should you use some of these tools? I have already shown you how I take a look at support and resistance points. For the most part, that’s all you’re going to need.
With the Dow Jones Industrial Average here, all I do is draw little ovals around where prices have dropped down to, and then rallied against them dramatically. I hope you understand that point. I’m not drawing these oval points at a point where prices are consolidating, like around this point. That’s not significant to me. Even though prices have sold off, they didn’t sell off significantly.
Here, they bounced off dramatically. They hit a point, and they bounced dramatically higher. Same thing here. It hit a point, and it bounced dramatically higher. That’s what I’m looking for. I’m not looking for just about any point. I’m looking for those points in which the market has hit, and there was a significant sell-off afterwards, or it was a point where the market had hit, and there was a dramatic increase in prices, afterward.
Those are the only points I am really interested in. If we come into more recent action, you can see that there was a significant sell-off here, here, and here, and a breakthrough. There was a significant sell-off here, here, breaking through this prior resistance point, a little bit of a run-up here, which was prior resistance a number of times, going back.
If I was to consider the fact that a resistance point is more significant based on the number of ovals I have drawn on here – there are 5, at this level right here. That makes it very significant. When a price does come back up to it, you might say, “You know what? It sold off here, here, and here. It will probably sell off again.”
That’s exactly what happened. In the daily review that I did for this day here, which was May 29, I noticed there was a significant amount of bearishness. It did hit this resistance point. The next day, which was on Friday, May 30, the daily review that I did for that day – I indicated that I was extremely bearish on the market. I took a put position in the Q’s at that point.
You can use support and resistance points as determinants of where prices may go. Again, you can never predict the future price of the market. You can manage the risk that you’re in on a particular trade, based on support and resistance points alone.
If you learn nothing else about technical analysis, you can live and you can survive, and you can thrive in the markets, just based on support and resistance points. That’s all that you need.
I’ve added a couple of other interesting tools to my arsenal, when it comes to technical analysis. That is channels. I like to use channels.