Stock prices when examined from week to week, rarely move in a
straight line - they move in more of a zig-zag fashion. It is this zig-zag in
prices which provides price resistance points.
For example, a rising stock (one in which we are perhaps holding a Long
Position) will rise in price for several weeks in a row. Then it will pause and
fall slightly for several weeks. Then it will begin to rise again and under
desired circumstances, continue to rise above the point it rose to previously
before it takes pause again. When we graph these movements over time, the
zig-zag of the stock (as viewed in hindsight) becomes very visible as Hilltops
and Valley-bottoms. These points where the stock price stops to change direction
(i.e., the Hilltops and Valley-bottoms) are what we are referring
to as resistance points. This same phenomenon occurs with stocks that are
falling in price, but of course in the opposite direction. Our Action History
Graphs were developed specifically to view these price resistance points, in
relation to the 30 week Moving Average.
It has been our modeling experience that Hilltops and Valley-bottoms can only
be determined in hindsight. We have no crystal ball - it is way too easy to be
fooled - we sometimes think we are looking at the formation of a Hilltop
or Valley-bottom only to find out a few weeks later that we did not have the
complete picture. This is why we rely on "confirmation".
Our process for confirmation is as follows: We only declare a Hilltop after we have seen three subsequent decreases in
weekly closing prices after the peak. Likewise, we only declare a
Valley-bottom after we have seen three subsequent increases in weekly closing
prices after the trough.
What happens if you don't wait for confirmation? Frequently, premature
adjustment of the Stop - resulting in premature Stop violations - resulting in
unnecessary losses or loss of potential profits.
