Support and Resistance
Think of share price fluctuations as a skirmish between buyers (bulls) and sellers (bears). The price at which bears and bulls reach a consensus and a trade takes place is the clearing price. There is a level at which bulls think the price will move up and which bears are not willing to sell. From that point, below which bears won’t sell and bulls are willing to buy, the purchases are the kinetic energy that generates higher prices, and trend. And, of course, vice-versa.

Thus, support levels indicate the price where the majority of investors believe that prices will move higher, and resistance levels indicate the price at which a majority of investors feel prices will move lower. Resistance is the opposite of support. It’s the point at which sellers take control of prices and prevent them from rising higher.

Electronic Communication Networks (ECNs) now account for approximately one-third of all NASDAQ trading, especially with the advent many years ago of deep-discount commissions via on-line transactions. A battle back then began to brew between the buy-side (pension and mutual funds) and the sell-side (old-line wirehouses such as Merrill Lynch). When the buy-side began demanding drastically reduced commissions on executions and the sell-side tired of caving in, the sell-side began to whisper to those who might listen, “Hey lesser commissions are great; but really, just how good is the quality of your execution?” Terms such as slippage, the concession over the current market quote to buy or sell the investment, gained greater currency. In time, both sides commissioned academic studies to support their argument. Ultimately, a consensus was reached that was perceived as elegant, but which, in practice, is anything but.

The theory now widely accepted is a default strategy wherein a variety of techniques will be employed to average the acquisition or disposition of assets, thereby ensuring there would be no bad executions. Of course, the Law of Unintended Consequences dictates the inverse: No bad executions means no good executions. The most commonly utilized of these strategies is VWAP, or Volume Weighted Average Price.

Despite the recent upsurge in prices, the market remains in its seasonal (summer) doldrums; that is, the market continues to oscillate within its base.

Yes, base. I realize most market commentators call repeatedly for a resumption of the bear market -- a plunge back to the lows, if not a sustained breakdown beneath those lows. But the bears have been wrong for 10 months now, as the market increasingly betrays its true direction, its winning hand.

Not!

See charts below...

[click on all charts to enlarge]

... and your first cogent thought is, "Keep away!" The thoughts that got you there include, "Sheesh, in near 2 years, all this stock has done is oscillate wildly (~$50 to $66), and got nowhere fast." And, "The stock appears to be breaking down, as it trades beneath its 50 and 200 day simple moving averages." And, finally, "Hey, the 50 day sma points down..." which all lead you to, "Keep away!"

Reader Patrick McGahren writes...

While I appreciate Mr. Buffet's challenge to Congress, I do not believe he would bet his money that this institution will meet the challenge. How to protect assets from currency depreciation may be headline news two or three years hence.

I begin with the end: Reading Minds and Markets, by Jack Ablin (with Suzanne McGee), is worthy of your time and money; for it, unlike many investment books, captures especially ably the dynamic nature of the investment markets.

In sharing his story, Jack Ablin attempts a Warren Buffett-ish folksy manner, not altogether successfully. From his view "30,000 feet from the ground," he shares his insights regarding investing and investments. Rather than provide a simple list of investment rules, Jack takes his readers on a schematicized journey through his investment career; along the way, he subtly disabuses this or that methodology, fundamental, technical analysis, valuation, and Nassim Taleb's Black Swan included. What worked, what did not work, what methodologies he disposed of and why, and which methodologies he retains to this day.

Jack's investment methodology is atypical of most investment managers, due to its humility...

For the past 11 years or so, I have viewed the market to be in a high level consolidation, described often on this blog, and most recently Sunday in the post, Da parvis grandis acervus erit. In fact, readers and other investors should recall my frequent mention of the 1966-1982 'bear' market as my template for the current market environment.

The surprising, startling market rally of the past 9 months neither surprises nor startles me; I expected it. (Which does not mean the market plummet did not frighten me, as it did you.) So the news that journalists and other investors now, finally, see what I have seen all this time -- or at least one portion of it -- is gratifying.

The chains of habit are too weak to be felt until they are too strong to be broken.
-- Samuel Johnson

While there are many tactical methods to make money when investing, there are only two primary strategic methods: top-down and bottom-up.

Stephen T. McClellan, the author of Full of Bull (Updated Edition): Unscramble Wall Street Doubletalk to Protect and Build Your Portfolio, was a Wall Street investment analyst for 32 years, covering high-tech stocks as a supervisory analyst. He was a First Vice President at Merrill Lynch for 18 years until 2003, and ranked on the annual Institutional Investor All-America Research Team 19 consecutive times.

And so on. No doubt about it: Stephen enjoyed a storied career. I obtained first-hand knowledge of Stephen's research while he and I were concurrently at Merrill Lynch in the early 1980s. Stephen's analyses were renowned for being in-depth, thorough, lengthy, and exhaustive. Some readers found fault in those qualities, others did not; I was among Stephen's fans. (I believe it better to have too much information than not enough.)

No, that is not my analysis, but the bears' constant growls. C'mon, we all know the refrain by now: for the past 5 months, with each new uptick, the bears stated flatly that the market was one step closer to resuming its plummet; with each new down tick, the bears stated flatly and gleefully that disaster was upon us. All their failed chart and technical analysis: the trend line breaks that spelled disaster but did not follow through; the negative channels, the waves, the failure patterns (my favorite was the recent head and shoulders top that everyone saw), etc, etc, ad infinitum.

So you have an investment that defies the so-called experts, and just keeps rising in a profoundly powerful up trend. What do you do?

Well, first pat yourself on the back: your initial step -- to buy and hold proves correct. Now you wonder, whence the ideal moment to sell? When does a trend of extreme strength become the moment of obscene strength? Consider the various constituencies:
1) Short-sellers must cover in a capitulative, melt-up run;
2) Short term longs (such as Louis Navallier) who buy and sell, buy and sell, buy and sell, now finally buy and hold, which also gooses the stock short term;
3) Long term longs (such as me) begin to sell their holdings, phasing out quietly.

The micropsia sequence of posts was not really fair, mostly because I revealed few items, if any [click links for posts, in order]. But now has come the moment to reveal several items. First, the companies (in order of presentation)...
1) BioDelivery Sciences (BDSI)
2) Spectrum Pharmaceuticals (SPPI)
3) OncoGenex Pharmaceuticals (OGXI)
4) Vion Pharmaceuticals (VION)
5) Isis Pharmaceuticals (ISIS)
6) Johnson & Johnson (JNJ)
7) Volcano (VOLC)
8) Thoratec (THOR)

You will discern rather quickly my second 'revelation' -- the obvious fact that all eight companies derive from one key market sector, health care. I selected eight companies from various groups from that leading sector, but with different chart patterns.

Price equals risk, I state often; I am not alone in that sentiment. Alas, with so many methods to measure price, they amount as too many. Two technical measures of price (action) include:
1) Price measured from a breakout, whether short, intermediate, or long term;
2) Price measured from a low, whether primary, secondary, or tertiary.

The two simple items above count as six (6) distinct measures -- and do not even begin to scratch the surface. To reduce to the irreducible, the two crucial perceptions are subjective and objective. And while the subject of this post is not Green Mountain Coffee Roasters (GMCR), it does qualify as an excellent example.

[Position update below]

Green Mountain Coffee Roasters (GMCR) reported earnings Wednesday after the close. The following comments re that earnings report are from Briefing.com...

An investor never really knows for how long a company or its stock will continue to trend -- whether positively or negatively sloped -- but each trend provides many signals that alert of a change of direction. A stock is even more clear than a company (even the parent company of the stock in question), because signals from a stock chart are fairly objective; only their interpretation is subjective.

Consider, for example, Green Mountain Coffee (GMCR). The company's Keurig remains the leading single cup coffee system -- and still in the early stages of development (of its opportunity). Estimates for the brewer and K-Cup growth remain conservative despite the difficult consumer environment. The general theme among the single cup coffee companies -- Keurig, Tassimo, and Senseo (which is the maker I own, for the opportunity to obtain Douwe Egberts coffee in the U.S.) -- is that single-cup coffee represents a value alternative to coffee shop fare. An arguable point, for sure, because no one really wants to become an at-home barrista. Keurig's strength has been a bright spot for its retail partners in the present terrible economy, so the company's biggest opportunity is not solely via increasing distribution but through a greater presence in existing retailers (such as Costco (COST)), which helps make the Keurig and the K-Cups easy to find and purchase. Also, the variety of blends (K-Cups) helps drive return store visits and reinforces the razor/razor blade model of organic growth, which in turn makes everyone happy; store, company, consumer, and shareholder.

Only a rumor at this moment, but according to sources at Apple (AAPL), the company will soon announce Verizon (VZ) to be an iPhone provider, thus ending with a punctuation mark Apple's exclusivity agreement with AT&T (T).

This rumor, if true, would make the iPhone a more compelling purchase, as Verizon (and Vodafone's Verizon Wireless) offers arguably the best 3G network, and, again arguably, the best cell network, period. Which all could, should, and would result in a goosing of sales of the iPhone.

Hmmm.