Should You Invest in a Stock with Overhead Resistance?
Although many investors are told not to buy a stock which has a substantial
amount of overhead resistance this can be misleading at times. Let us look
at an example of a stock which did very well in 2002.
BLUD which had some overhead resistance around the $12.50 level formed a low
level Cup and Handle (point A) pattern in 2001 and then broke out in the early
part of 2002 accompanied by increasing volume (point B).
After breaking out in the early part of 2002 BLUD then rose from $5 to $10 a
share before stalling out in March. BLUD then preceded to form another
longer term Cup and Handle pattern before breaking out again in May of
2002.
Over the next few weeks BLUD rose from $8 to $12.50 before
stalling out again which was near its longer term overhead resistance
area. Meanwhile after stalling out near its longer term overhead
resistance area BLUD then developed another longer term Cup and Handle (point C)
pattern prior to break out for a third time in June of 2002 accompanied by good
volume. After breaking out in June BLUD eventually rose to around
the $25 level by the end of the year (point D).
As the charts show above investors were given three separate
opportunities to invest in BLUD during 2002. Those investors that noticed
the first Cup and Handle pattern during the latter half of 2001 into the early
part of 2002 were well rewarded as they could have realized a net gain of nearly
400% ($5 to $25) versus those investors who waited for BLUD to break above its
longer term overhead resistance area near the $12.50 level. However even
those investors who waited for BLUD to clear its longer term resistance still
could have potentially doubled their money ($12.50 to $25). Thus even
though a stock may have some longer term overhead resistance that doesn't mean
it should be ignored especially if it is developing a favorable chart pattern
such as a "Cup and Handle".
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