Page 138 - THE MARKET WHISPERER

136 PART 5 - Principles O f Technical Analysis

Why does the last low create support?
Here, too, we need to understand the psychological perspective of
buyers and sellers. At every point on the chart we will find both buyers
and sellers, but in this case, we call the sellers “short sellers.”
At the stock’s low [1], short sellers cannot yet identify this point as the
low. In a burst of enthusiasm over a weak stock price, they execute a short,
hoping that it will continue dropping.
In actuality, they discover that the stock is rising against their hopes
and they are losing, which disappoints them. They promise themselves
that if the stock returns to its pre-short price (that is, the same price as the
previous low), they will correct their mistake and close the short (that is,
they will buy).
If the stock does drop to the same low [2], it will encounter all those
disappointed short sellers who are thrilled that the stock returned to their
entry position.
Can the stock overcome the support of buyers and drop to a new low?
Maybe yes, maybe no… The answer depends on the balance of forces
between sellers and buyers.
In the chart above, we see that the stock continued dropping [3]. In
other words, in this case, sellers won. The rise at point [2] from the low is
called a “double bottom.” When the stock drops to a double bottom, in
most cases it rises again because of the support created by buyers.

How Does a Drunken Snake Crawl?

In a straight line!
Just as a snake will never crawl in a straight line, a stock will never

move in a straight line, but always in ups and downs and in highs and lows.
Remember this when a stock is moving in the opposite direction to

what you want. Usually a stock moves “against” your wishes because that
is its nature, which does not necessarily imply that the trend has changed.

Differentiate between episodic noise in a stock’s movement and real
change in trend. We will discuss “noise” regarding stock prices later.