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Here's How to Predict the Market's Next Move

By Chris Rowe March 17, 2008 Facebook Logo Twitter Logo Email Logo LinkedIn Logo

My Tycoon Report article last Tuesday was titled "Bear Market Here We Come? Don't Fight the Tape". The funny part about that was as we fired that article out to your e-mail box, the Fed announced that it was "injecting 200 Billion into the banking system", causing the major indices to rally 3.5% to 4% for the biggest 1 day rally in 5 years.  Hilarious!

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Before I show you another way to predict the market, an important announcement:

WE WILL BE THERE FOR YOU THROUGH THIS MESS!

We flew some Tycoons in over the weekend, and we have been putting our heads together on some great ideas on how we can help you through this market.  We are professional traders, with lots of money management experience.  We've managed money for institutions, as well as individual investors.  I personally have had relationships with thousands of individual investors, whether I managed their money or not, and it's safe to say that after 12 years of communications, I have a pretty good idea what goes on in your head in times like these. 

So we will be here for you, for free, and soon we will tell you how.  Stay tuned folks, and we'll get through this together.

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PREDICTING THE MARKET

Predicting the market doesn't have to be about speculating on the next 100% 2-week gain.  Understanding when the odds weigh heavily in favor of a stock or index, moving in either direction, can also clue you in as to when it's a good time to hedge your biggest position, or even exit a position before it moves against you (like Bear Stearns - WOW!).  

Over the years, I've been trying to demystify "technical analysis", a term that may sound boring or intimidating.  Let's talk about one of the most important and easiest rules to understand and remember.

Past support levels become new resistance levels, and past resistance levels become new support levels.

This works in many ways.  First, let's start with the most basic and easy to understand scenario: The horizontal support and resistance levels.

Below is the chart I was showing you in last week's article of the NYSE when it broke its support level.  Now, the basic rule (usually not "to the T") is that the old support level (in this case, about 8,600 - green line), once broken, becomes the new resistance level.  So, in a situation like the one last week, if the stock market rallied I would have looked for it to have trouble moving above 8,600.  Of course, the market bolted on the Fed announcement.

However, what many people tend to forget in these situations is the old support that had just been violated (8,600 - red line) won't always be the new resistance level that the market or stock runs into in an attempted rally.  Below, you can see that although the NYSE violated support at 8,600, it moved back above 8,600, then found resistance at another past support level near 8,900 (blue line).

So you have to always keep all key levels in mind, and it's not hard to figure out where many of them are found.

Let's look at the most talked about stock today: Bear Stearns (BSC).

It was easy to see when the big Bear was at it's peak that it was moving lower.  At that time, we took a bearish position at The Trend Rider and made about 123%.  The green lines represent the support levels. When the green lines turn red, it's because Bear Stearns violated that support level, making the old support levels the new (likely) resistance levels.

I tried to make this easy to follow by matching the arrow colors to the same price levels that, at first, acted as support, and then turned into resistance.  Who could have known (besides the most informed and privileged traders on Wall Street) that the stock would get cut in half one day and then move to the $3.00 - $4.00 range the next day?

It's hard to see in the chart above, but, near the last purple arrow and the last red line found to the far right, what happened was the following: The stock broke support, and the next morning the CEO was on CNBC talking about how there is little to worry about - basically talking up the stock - sending the stock 7 points higher.  The stock rallied back up to its old support (new likely resistance) level, and that's just about all she wrote.

Less than a week after Bear's CEO Schwartz goes on CNBC to reassure investors his company has enough liquidity and he is "comfortable" that they'd turn a profit in the fiscal first quarter (while trading at about $70.00), Bear Stearns got bought out for $2.00 by JP Morgan!  In case you have been asleep for the last 36 hours - that's not a typo!  (What, did they have compromising Polaroids of Schwartz and Spitzer in a hotel?  Okay, that was just wrong Chris.)

Anyway, without any inside information about the future of the Big Bear, if you watched the stock rally back up to the old support, and you bought some put options because it was a safe bet, you would have had a decent trading day.

Now I won't beat this Bear, oh, um, I mean this horse to death here.  But here's something else to think about:  We've just gone over the horizontal support and resistance levels.  The same rule applies to other support and resistance levels, such as moving averages, and even more so with trend lines. 

As a stock or index bounces off of an uptrend line again and again, it becomes a much more important, and valid, support level.  Once that support level is broken, it acts as the new resistance level.  And the more valid the uptrend line was (because it was tested so many times), the more important the violation was and the stronger the resistance will then be. 

The reverse is true with down trend lines. 

For more articles that talk about this same topic (trend lines), check out my articles in The Tycoon Report Archives.  You can start with the articles titled "Profit From the Trend" and "3 Winning Stocks... To Avoid".

So long folks.  I should say "so short".  Stay tuned for a big announcement on how we are going to hold your hand in this market - the type of market where fortunes are either lost or made!!!

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