IGT: Some Support is Bigger Than Others

06/01/01 01:37:57 PM

by David Penn

Will a support area hold? It depends on how much it matters to the buyers.

Security: IGT
Position: N/A

With an upwardly trending stock, buying on the correction ("buying the dip") is the textbook maneuver. The specific timing is a matter of personal technique. Some like to see the last move retraced on weak volume. Candlestick chartists will likely look for white soldiers and strong bullish candlesticks. Another indication that can occur is that the correction will retrace toward a support point. Should the support point be a strong one, it might be a good place to lay and wait for an opportunity to go long. However, if the support point is weak, then prices could come crashing down through both the weak support point and the trading position.

One way of determining the strength of a support point is by noting how many times a decline has halted at the level of that support point. Such a "halt" represents an area where buyers have found the stock to be, if not a bargain, then at least well worth buying. Chances are, given continuing or momentum-based interest in the stock, other buyers will pay the same or a similar price. The chances of this sort of "follow-through" are greatly increased when heavy volume accompanies the buying. This heavy buying volume gives momentum and technically oriented traders an excellent signal that the advance is likely to be sustained. Why? Because the stock now has far more people with an interest in defending the stock's price that it did before, shares will be much more resistant to selling. Another way of looking at this scenario is, of course, through supply and demand. As more buyers scoop up shares outstanding, there are simply fewer shares to go around. This means that later buyers will have to pay more to pry shares away from those currently holding them, driving up the price of the stock in general.

Figure 1: Buying, buying and more buying is providing strong support for further advances in IGT.

Graphic provided by: MetaStock.

The first support area is at the beginning of the year, when shares briefly dropped out of a one-month consolidation. Falling prices were met with major buying interest in mid-January, which moved the stock from the low 40s to the high 50s by March. As the rally sold off, IGT again drifted downward. However before IGT could reach the low 40s, a second wave of buying struck, halting the decline and sending IGT into a trading range in the upper 40s. It took yet another wave of buying in mid-April to propel IGT above its previous high of about 57 that was reached in March. These three "buying waves" are largely responsible for providing support in the upper 40s for IGT as it moved into new high territory.

In fact, the third "buying wave" helped establish support not in the upper 40s, but in the mid 50s where IGT broke a long-term resistance line. Although prices drifted down somewhat between mid April and mid May--when the most recent buying wave took place--prices never fell much further than 54. This has largely to do with the heavy buying in April when IGT was at these levels. Those looking to sell IGT short had to be concerned that the same longs who scooped up shares in the mid 50s would be back in force if the bears tried to push prices down too far. While the last buying wave in mid May did raise IGT to still yet another new high, that buying wave is particularly noteworthy for the additional support it provides in the 53-55 level.

The reason why this is important is clear to anyone who follows stocks that breakout upward with the ferocity of IGT, with its long bullish candlesticks and upward gaps. In order for IGT to advance in a sustainable fashion, some correction or consolidation is likely necessary. Currently IGT is trending downward, filling the gap that occurred during the upmove. Should IGT remain above its prior high of 58 or, failing that, at least rally from the support at 53.5, then the stock's long-term uptrend, which became more steep in September 2000, should prove to be a reliable ride for the bulls who choose to go along.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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IGT: Some Support is Bigger Than Others

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