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Trend Zone

What a Stock's 'Resistance,' 'Support' and Moving Averages Tell You

July 21, 1998|WALTER HAMILTON

The outlook couldn't have been bleaker for Intel and its stock price on June 3.

The semiconductor giant was being rocked by everything from weak personal-computer demand and falling chip prices to looming antitrust charges and investors' fear of a second-quarter earnings warning.

Intel's stock, which had been at $95 in February, fell almost 5% on June 3 to just below $66--and looked to many people as if it would head even lower.

But to investors using technical analysis, the picture was quite different. Technicians, as they're known, focus not on a company's sales and earnings trends but rather on the price and volume patterns of its stock.

What did the technicians see? They knew that the stock had fallen to a range of $65 to $68 four times in the previous 15 months, but that it had never dipped meaningfully below that.

That was a key piece of information. The fact that Intel's stock previously had "support" at that level meant it might have it again. So an investor might have decided to buy Intel that day partly on the assumption that the drop in the stock was just about over.

As it turned out, the technicians were right. Intel recovered the June 3 loss within two days, moved sideways for a couple of weeks and has since moved up to $81.75 as of Monday.

The notion of "support" is one of several basic technical analysis tools that individual investors can use to improve their stock picking.

Technical analysis is closely identified with Wall Street pros and so-called day traders who rapidly trade in and out of stocks. But technical analysis can be just as helpful to buy-and-hold investors.

Fundamental research helps individuals decide which stocks to buy and sell. By contrast, technical analysis gives clues about when to buy and sell them. Even investors with long-term time horizons can benefit by buying or selling at the most opportune points.

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Look at the Intel stock chart accompanying this story. It shows that before the early-June decline to the mid-to-high $60s, Intel had sagged into that range last October and again in December. Both times, the stock recovered in fairly short order and moved higher. The same pattern occurred in spring 1997.

That's known as support: Each time the stock drops to a certain level, it's supported by investors who jump in and buy, thus preventing the shares from falling lower.

Why do stocks find support at certain levels?

To answer that question, consider an example given by Michael Kahn, chief technical analyst at BridgeNews, a unit of Bridge Information Systems, a New York-based data company.

Imagine that an investor considered buying a stock when it traded at $50. But while the investor mulled the decision, the stock quickly skipped ahead to $70. The investor considered the stock reasonably priced at $50 but thought it overvalued at $70.

However, he continued to track it, figuring that if it ever drifted back toward $50, he would move into it.

"You have in your head that $50 is a place you should have bought it, and now you have a second chance," Kahn said.

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The actions of a second type of investor also create support. This group didn't see the stock when it initially traded at $50. They did, however, see it at $70. And just like the first group, they also began watching the stock and were prepared to buy around $50.

The first two sets of investors probably used fundamental analysis. That is, after studying the company's sales, earnings and future prospects, they decided the stock was attractively priced at $50.

Once the first two groups have acted and the stock has once or twice rebounded at $50, a third group of investors enters the scene. They're the technically oriented investors. Having witnessed support kick in around $50 in the past, they jump in the next time it reaches that level. In effect, the dynamic of support becomes something of a self-fulfilling prophecy.

"If you think about buying a stock and it's close to or at a support level, then your comfort level is going to be relatively high because there's been demand at that level in the past," said Richard Dickson, a technical analyst at Scott & Stringfellow Inc., a regional brokerage in Richmond, Va.

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Technicians watch another indicator, known as "resistance," that works on a principle similar to support. To understand resistance, look at the chart of Applied Materials stock.

Like Intel, Applied has recently found support at a particular level--about $26 a share, since December.

But Applied also has had a resistance level of about $40, which is depicted by the line drawn near that level in the chart.

Whereas stocks often stop falling when they hit support, they often stop rising when they reach what has historically been a resistance level.

Since early November, Applied has hit resistance near $40 five times and come close a sixth time. Each time, the stock made a one- or two-day attempt at piercing $40, then fell back.

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