Technical analysis of the charts is at the core the study of human behavior. The price of any stock is the collective result of buyers and sellers fighting each other. And the study of technical analysis is the study of what the buyers and sellers are doing as they confront each other. It also shows us what is likely to happen when buyers and sellers who have not seen each other in a while are reunited.

Many people bought shares when JSDA became popular in March (where the gap is). Lets say you are someone that got in during that time. And your a “buy and hold” investor (which many people are). Then in mid April the price started rolling over so the ‘buy and hold’ investor keeps holding on and hoping that the price will turnaround. Often they ignore their holdings and only really take notice when green turns into red. In late June JSDA dropped below the price where many new share holders got in. Now their holding turned red. And the red made them say “if this gets back to my original buy point I’m selling”. They think that JSDA ended up being a loser and all they want to do is get out and hope they can get out at a break even. They have been ‘burned’ by JSDA in their mind and all they want is to exit the stock, so as the price got back towards the price where many got in they were now getting out. In their view they are taking advantage of the price increase to get out because they don’t trust the company anymore to hold it any longer than that.

This is why I set $17.00 as the significant level the stock must close above. To signal that the number of sellers trying to get out was getting smaller. Now that we have those sellers out of the way we can concentrate on a more stable baseline setup to work with. And with the added benefit that a lot of sellers have left the table. The movement back up through the gap was a war zone of the old buyers now selling, new buyers now buying, and the shorts covering. Trying to establish a swing trade setup in the middle of that war zone is not the smart thing to do. And waiting for the close above $17 gives us the signal that a truce may have been reached.

The swing trade setup I have laid out is for an entry of a 1/2 position once the price advances up past the recent war zone and the second entry as the price advances up past the final remains of the war zone. If we want to make money in the stock markets we must stand back and observe the stock with a wide angle view. Imagine your standing on top of a mountain and can see rival gangs, one off to the left and the other off to the right. They can’t see each other but you can see them getting closer together and think that when they meet there will be a battle. Technical analysis is the standing on the mountain and watching for what might happen at certain times (price levels). And the one that was standing on the mountain waits for the battle to end before making a move. It increases his chances of survival because he waited for the battle to end before moving along the road.

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