violation of the support line didn’t get your attention,the gap down certainly did. Remember what I said earlier about a stock going downuntil something happens to make it stop going down (i.e., the “falling knife” comment)? It’s very important not to get into the mind-set of “ICGAL” (it can’t go any
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Figure 9.19
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Bullish Trend Line (Courtesy of QCharts (www.qcharts.com))
lower)! It can and it will—and it did. It would appear this stock had some bad news ofsome sort, and that means it’s a cockroach situation (to me, anyway). You know if yousee one cockroach, there’s sure to be more. One item of bad news means there’s agood chance more is on the way. This chart certainly confirms that saying!The opposite is also true. Figure 9.21 shows the OEX on a slippery slope headedsouth. But when it does regain its footing and breaks the upper range of the trend line,it’s Rally City! This example uses a candlestick chart to illustrate a reversal in a pattern.There are two varieties of trend lines: continuation and reversal trend lines. Acontinuation trend is like a highway in western Kansas: It just keeps on going. Butwhen that highway reaches a “Bridge Out” sign, you have to turn around and reverse your course. A continuation may increase its gradient, or begin to flatten out.It’s still continuing. But when there’s a break down in the trend line, or break up (asin Figure 9.21), that’s called a reversal and is very important.When you look at charts, you’re looking for patterns that will help you to forecast the future movement of the stock. There are a variety of patterns that analystscategorize as continuation or reversal patterns. A continuation pattern in a stockchart is an area of consolidation, prior to a stock resuming a trend. For instance, astock with a strong uptrend will sometimes pause and move sideways for a periodof time. When the stock breaks out of that sideways pattern and back in the direction of the previous trend, that period of sideways movement, or consolidation, is
THE USE OF OSCILLATORS
Figure 9.20
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Support Line Violated (Courtesy of QCharts (www.qcharts.com))
considered a continuation pattern. Examples of continuation patterns are triangles,rectangles, scallops, and pennants (which will be described in more detail in Chapter 12). A reversal pattern is the area on a chart before a stock breaks out in a direction opposite to the previous trend. For instance, if a stock makes a yearlongadvance and reaches $100, falls back down to $80, advances up to $100 again, andthen begins a yearlong decline, the reversal pattern on the chart is known as a double top (it has risen to $100 twice and changed direction). Chart patterns consideredreversal patterns by technical analysts include double bottom or top, triple bottomor top, broadening top, and head and shoulders.This is just a thumbnail sketch of charts, volume analysis, and their applicationin technical analysis. These are by no means the only tools used, just the easier onesto begin with. Next, let’s investigate some other tools you can utilize to determinefuture market direction.
THE USE OF OSCILLATORSThere are two basic kinds of indicators: lagging indicators and oscillators. Lagging indicators are those techniques that confirm a trend divergence after it has happened. Oscillators are useful in indicating when a market is overbought or oversold by assessing
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Figure 9.21
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OEX Breaks Downtrend (Courtesy of QCharts (www.qcharts.com))
when a market has reached a high to the upside or a low to the downside. When a market reaches a peak in either direction, it is ripe for a reversal and managed risk strategies can be applied to take advantage of this potential movement.Oscillators are indicators that help traders to identify a market’s momentum byfocusing on the rate at which a market is moving. A price oscillator is an indicatorthat displays the difference between a slow and fast time period, subtracting it fromthe current interval’s price. Utilizing price and volume statistics, oscillators enabletraders to predict the strength or weakness of a current market, overbought or oversold conditions, as well as turning points within the market. Momentum charts andrate of change (ROC) oscillators can both be used to help you initiate momentuminvesting by trading with or against the momentum of the market in hopes of profiting from it. A rate of change oscillator is a percentage indicator that calculates themarket’s change from the current interval’s price versus price n intervals ago.The McClellan Oscillator uses the 19-day and 39-day exponentially smoothedaverages of the daily advance/decline values. A move above zero is a signal to buy;and a move below zero is a signal to sell. Oversold conditions exist if this oscillatorregisters a very negative reading in the vicinity of –100. Overbought conditions exist when this oscillator registers positive readings above 100. This oscillator is primarily used to identify divergences and to confirm trend reversal levels.
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Lagging indicators: Often used in reference to economic data, a lagging indicator is a variable that tends to follow changes in overall economic activity. Therefore, a lagging indicator reaches a peak after the peak in economic activity anda bottom after the economy has troughed. Similarly, in reference to some indicators used in technical analysis, a lagging indicator will reach a top or a bottom following the stock or index. Examples of lagging indicators includeMACD, MACD-histogram, on-balance volume, and accumulation/distribution.Oscillators: Leading indicators that identify overbought and oversold conditions. They’re shown as a wave of sorts, undulating above and below a midline.When it reaches the lower side of the midline, the market is said to be oversold;when they reach the upper side of the midline, the market is said to be overbought. These extremes signal to a trader that a reversal could be very close.Traders also look for divergences between an oscillator and the price action of astock or index. These can serve as warning signals, prompting the trader to closeout a position and/or initiate a new one, in anticipation of a trend reversal. Itshould be noted that oscillators work best in nontrending markets. When overallmarket conditions are obviously bullish or bearish, oscillators will signal overbought and oversold conditions for long periods of time. This makes the oscillator as reliable as a broken fuel gauge. In a strongly trending market, look toother technical analysis instruments such as trend lines and volume for a moreaccurate reading of conditions. One last thing the trader looks for is when theoscillator crosses the midline, foretelling of a possible change in the trend.
MOMENTUMThe Big “Mo” is an indication of the power behind a stock or index, building andlosing momentum. Here’s a simple analogy: If your Uncle Wally is running at youfull force, he’s likely to run you over; but if he’s just shuffling along slowly, he’lljust bump into you with little or no effect. It’s the same way with stocks. If CiscoSystems is barreling ahead and it’s about to encounter a former resistance level,chances are decent that it will break through. But if it has the impetus of a death rowinmate walking the Green Mile, it probably won’t continue on in the same directionwithout some help.Momentum is simply the rate of change (the speed or slope) at which a stock orindex climbs or drops in value. It is calculated by taking the difference in pricesseparated by fixed time intervals, such as 5, 10, or 50 days. The intervals youchoose depend on your investment time frame. Traders use this indicator as a buysignal when it turns positive, and a sell signal when it turns negative.In Figure 9.22, the line below the bar chart of Cisco Systems is the momentum indicator. It clearly depicts a momentum shift right after the stock split inMarch 2000, which was aided in its descent by the April Tech Wreck. The horizontal midline delineates positive and negative momentum. With rising prices
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Figure 9.22 Cisco Systems 15-Day Momentum Indicator (Courtesy of QCharts(www.qcharts.com))
(stock heading up), a momentum indicator above zero and heading up indicatesupward momentum is increasing. If it’s above zero and moving down, upwardmomentum is decreasing. If a stock or index is declining in price and the momentum indicator is below zero and moving down, downward momentum is increasing. If the momentum indicator is below zero and moving up, downwardmomentum is decreasing.
Momentum indicator: The momentum indicator is used to identify overbought/oversold conditions in a stock or index. It is calculated by subtractingthe price for a certain number of previous days from the price of the current day.For example, the seven-day momentum indicator equals the most recent closingprice minus the closing price seven days ago. If the most recent price is higher,momentum is positive; if it lower, it is negative; and if it is unchanged, it equalszero. Furthermore, if the stock or index has increased by more than a certainnumber of points (depending on the price of the asset at that time), it is considered overbought. If, on the other hand, it has decreased by more than a certainnumber of points, the stock or index is oversold. A positive value reflects anoverbought market, while a negative value reflects an oversold market.
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RELATIVE STRENGTH INDEX (RSI)The Relative Strength Index was developed by J. Welles Wilder Jr., and subsequently published in his book New Concepts in Technical Trading Systems (June1978). Mr. Wilder discussed two problems with the momentum indicator line. First,there were erratic and sudden changes in the line on days when large price swingswere dropped from the average. This created a need for some sort of smoothingmechanism. The second was the necessity of a constant range for the purposes ofcomparison. The RSI addresses both of these issues.Relative Strength Index (RSI): The Relative Strength Index indicator, or RSI, isused to identify overbought/oversold situations in a stock or an index. In otherwords, it is used to identify buying opportunities during short-term market declines and selling opportunities during market rallies. RSI is always between 0and +100. Higher numbers indicate overbought conditions and opportunities tosell. Lower numbers indicate oversold conditions and opportunities to buy.
The sharp fluctuation problem was corrected by using this formula:RSI = 100 –where RS =
100(1 + RS)
Average of x days’ up closesAverage of x days’ down closes
In other words, Wilder utilized averages and not just simple numbers (like the momentum indicator) to calculate and plot his RSI. Traders understand that to make theRSI more pronounced, they use fewer days in the equation. If they’re more interestedin longer-term price action, more days are used. (Sounds easy enough.) Next, he useda constant range of 0 to 100, and plotted this on a vertical scale. A reading above 70 isconsidered overbought, while a reading under 30 would indicate an oversold condition. He went on to explain how bear market conditions would push the oversoldnumber to 20, while a bull market would push the overbought reading to 80.The miracle of hindsight shows that on July 20, 1998, the Nasdaq topped out at2,022 (see Figure 9.23). The RSI stood at 80, a textbook oversold condition for a bullmarket. Somewhat prematurely the RSI hit the textbook definition for an oversoldbear market on August 31, 1998. Capitulation did not occur for another month or so.October 8 was the day every optimist in the world gave up hope, marking the truebottom at 1,357.09. The RSI stood at slightly more than 29. Either point would haveserved the long-term investor well, as thereafter the Nasdaq went on a major run.
MOVING AVERAGE CONVERGENCE DIVERGENCE (MACD)This isn’t a refreshment break for burgers at the Golden Arches, but rather a study ofthe moving average convergence/divergence (MACD) indicator. This combines
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Figure 9.23 Nasdaq with RSI High and Low Readings (Courtesy of QCharts(www.qcharts.com))
previously discussed oscillator principles with a dual average crossover methodology.(Got all that?) It’s derived by dividing one exponential moving average by another, andis plotted on a chart with a midline, or equilibrium line. The exponential aspect, as yourecall, gives more weighting to the latest time units, thereby smoothing out sudden gyrations. A buy signal is generated when the faster MACD line crosses above the slowerline. A sell signal is generated when the faster line passes under its slower brother.Moving average convergence/divergence (MACD) indicator: Sometimes pronounced “MAC dee,” it is the difference between two moving averages with different time periods. One moving average (MA) will be the average over arelatively short period of time—for example, 11 days. The second moving average is the average price change in a stock over a longer period of time—for instance, 26 days. The first (shorter) MA is referred to as the fast line and thesecond as the slow line. MACD is the difference between the fast and slowlines. During periods when a stock or index is rising, the fast line will rise fasterthan the slow line, causing the divergence between the two lines to increase.The fast line will react faster to the most recent data. A signal is generated whenthe two lines cross over each other. When the fast line is above the slow lineand moves lower to cross over, it triggers a sell signal. When the fast line is below the slow line and crosses over it, it gives a buy signal.
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But what makes the MACD different from the dual moving average system isthat it also fluctuates above and below a zero line, making it resemble an oscillator. When the two MACD lines extend far above the zero line, they represent anoverbought condition; if they drop too far below the zero line, they signal anoversold condition.Another valuable aspect that is often used with the MACD oscillator is theutilization of a histogram. A histogram is an illustration of the difference between the two MACD lines. It, too, fluctuates above and below a zero line. Thekey is to look for when the bars of the histogram grow far above or below thezero line. This indicates the occurrence of a divergence, and a turn is often imminent. Many traders will wait for the histogram to cross the zero line before initiating a new position or trading out of an existing one. Others act as soon as theturn begins—up or down.
MACD histogram: MACD is typically depicted on the bottom of a stock or index chart along a zero line. When the fast line is above the slow line, theMACD histogram will be positive and above the zero line. When the fast lineis below the slow line, it will be below the zero line and negative. Therefore,the MACD histogram shows the difference between the long-term and shortterm moving averages. When the fast line is moving up more than the slowline, the MACD histogram rises and confirms the move higher in the stock orindex. If the stock or index is rallying and the MACD histogram is not movinghigher, the rally is not confirmed and likely to prove short-lived. The sameanalysis is used during market declines. Therefore, the MACD histogram isprimarily used to gauge the health of the trend in a stock or index. If it ismoving in the same direction of the stock or index, it is considered a healthytrend.
The MACD histogram is a leading indicator. When it turns, it’s like a highwaysign indicating roadwork ahead. Watch for the orange cones, but keep driving untilthey steer you around the construction. Watch the MACD lines themselves for theactual turning points (see Figure 9.24).
BOLLINGER BANDSBollinger bands are envelopes that surround price bars on a chart and are plottedtwo standard deviations away from a simple moving average. This differentiatesthe Bollinger bands from price envelopes, because envelopes are plotted by using afixed percentage above and below a moving average. Standard deviation is a measure of volatility and always changing (according to price fluctuations), soBollinger bands adjust themselves to the market conditions. They widen duringvolatile market periods and contract during less volatile periods. I like to look atthem as volatility bands.
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Figure 9.24
TECHNICAL ANALYSIS UNVEILED
MACD and Histogram Signals (Courtesy of QCharts (www.qcharts.com))
Bollinger bands: Trading bands are a commonly used technical indicator. Basically, bands are two lines drawn at intervals (usually a percentage) around a moving average. Bollinger bands vary in distance from a moving average based on astock or index’s volatility. When the stock or index is exhibiting greater volatility,Bollinger bands will move away from the moving average. During periods oflower volatility, the bands will narrow around the moving average. Furthermore,Bollinger bands are used to indicate overbought and oversold conditions. Asprices move closer to the upper band, the more overbought the stock or index is.If prices move toward the lower band, it indicates oversold conditions.Standard deviation: In financial analysis, an often-used statistical measure. It represents how widely dispersed the individual price values are away from the average (using the same parameters). A large standard deviation in the price of a stockor index suggests higher volatility. A low standard deviation suggests low volatilityin the stock or index. Mathematically, it is the square root of the variance.
There is a third line that runs in between the bands, which indicates the moving average. This line can be adjusted, using shorter periods for short-term trading, and extending out to fit your own time preferences and horizons (see Figure9.25).
BOLLINGER BANDS
Figure 9.25
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Bollinger Bands (Courtesy of QCharts (www.qcharts.com))
The most basic use of the Bollinger bands is to use them as a gauge of overbought and oversold conditions. But to use this indicator strictly on that basiswould be doing yourself an injustice, because Bollinger bands do not generatebuy and sell signals alone; that is, they are much more powerful when used intandem with other technical indicators. Coupled with the RSI indicator, they become extremely useful. For example, if a stock’s price hits the upper band, atrader might be tempted to sell. However, if the RSI scale indicates a reading of70 (80 being the overbought reading), the two together would signal further upside potential.The possibility exists where the price touches the upper Bollinger band and RSIis 70 or even touching 80, as in Figure 9.26. This could be an indication that thetrend may reverse itself and head south. If the price touches the lower band and RSIis in the 20 to 30 range, it might be an indication to start nibbling at the stock, in anticipation of a trend reversal.It’s a good idea to limit the number of indicators you decideto work with simultaneously; otherwise, your chart willbegin to resemble a bowl of spaghetti with numbers in it.
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Figure 9.26
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Bollinger Bands with RSI (Courtesy of QCharts (www.qcharts.com))
STOCHASTICSGeorge Lane developed an indicator that relates the closing price to the range inprices for a prior period of time. He called this indicator the stochastic and foundthat 21 days was the optimum time period. The 21-day price range is calculated bytaking the lowest price and subtracting it from the highest in the period and thencharting it as a percentage on a scale of 0 to 100.In its most basic terms, stochastics are based on the observation that as a stockincreases in price, the closing price is higher to the upper part of the price range. Asa stock (or index) declines in value, the closing price tends to be near the lower endof the price range. (Okay so far. . . .)Stochastics: A leading technical indicator designed to pinpoint short- and longterm reversals in trends, by recording closing prices in relation to a recent trading range over a certain period of time.
Stochastics show where the most recent closing price is in relation to the pricerange for a chosen time period, and use two lines to do it: fast and slow. The fast
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line, as its name suggests, moves quickly and is used to anticipate price changes.The slower line is calculated by smoothing the fast stochastic line and producesclearer signals. These two lines are labeled %K and %D. The %D line is the oneeveryone looks at to provide the clearer signal. Like the RSI, the stochastics indicator often uses 14 days as a chosen time period. Instead of figuring out the equationsinvolved here, let’s cut to the chase:• %K is the fast line.• %D is the slow line (more reliable and used most often by traders).These two lines oscillate on a scale from 0 to 100, 20 being really low and 80 being very high. A bearish signal occurs when the %D line is over 80 and forms a divergence from the stock or index price, turning down while the prices continue up.When the %K line crosses the %D line, a signal is generated. If %D follows %K, achange in trend is confirmed. Remember to look for a divergence between price andstochastics. The chart in Figure 9.27 shows PMCS with the stochastics indicators.Stochastics are best used to locate entry points in major trends especially after aconsolidation or to help determine reversals in trading ranges. Although they provide ahelpful edge in finding profitable entry points, be careful! Avoid buying when a stockappears overbought and shorting when a stock is oversold—sound advice to all traders.
Figure 9.27
Stochastics for PMCS (Courtesy of QCharts (www.qcharts.com))
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A FINAL NOTE ON TECHNICAL ANALYSISThe study of technical analysis is such an immense subject that I can scarcely do itjustice in one short chapter. Each of these discussions is designed to make you a little more aware that this world exists and that you should be aware that it influencesthe decisions of some very smart people.Technical analysis is by far the most complex area of learning to trade. However, don’t let its complexities overwhelm you. It has its good points, but I neverrely on it exclusively 100% of the time. I use other tools and methods to verifywhat the charts are saying and to acquire the best view possible. Make no mistake—you can overdo any kind of analysis so that you begin to resemble a deeron the highway: wide-eyed and frozen by analysis paralysis. Start out by workingwith basic charting techniques until you get a feel for how to read a chart. Thenstart to integrate moving averages into your trading approach. Moving averagesare the most popular (and easiest) technical analysis methods used by traders today. Their popularity means that they are a big part of market psychology. Fromthere, you may want to integrate oscillators into your approach. It is very important to be able to recognize overbought and oversold conditions so that you don’tthrow money down at the wrong time. Just keep trying new techniques and seehow they work for you, implementing them one at a time into your decisionmaking process.I believe the way to use technical indicators is to look first at weekly indicatorsto get a basic view of the big picture. Once you have a general understanding youcan fine-tune your entry and exit points using daily graphs and figures. The market is too vast to see it all, so decide what sector you can actually understand (orenjoy following), and focus on it. It’s like learning to cook. You have to start byboiling water and melting butter before you try to make a five-course meal fit fora king. I discussed only some of the indicators, and then only briefly. All of thesetechniques take time to get to know. Once again, perseverance will be the key toyour success.
If you want to become better acquainted with this field of study, I suggestseveral books for your review:• Technical Analysis of the Financial Markets by John J. Murphy, PrenticeHall Press, January 1999• Timing the Market by Curtis M. Arnold, Probus Pub. Co., June 1993• Technical Analysis of Stocks, Options & Futures by William F. Eng,Probus Pub. Co., May 1998• Integrated Technical Analysis by Ian Copsey, John Wiley & Sons, May1999
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ROADMAP TO SUCCESSObjective
Course of Action
Technical Analysis Definition
Technical analysis is the study of marketaction, primarily through the use of charts, forthe purpose of forecasting future price trends,according to Technical Analysis of theFinancial Markets by John J. Murphy (NewYork Institute of Finance, June 1999). Technicalanalysis relies solely on price and volume ofthe market itself to determine the supply anddemand of stocks at various price levels.
Why Use Technical Analysis?
Trend Identification:• In which direction is the stock or indexgoing—up, down, or sideways?Historical Precedents:• What were the previous points at whichtrends ended or reversed?Market Reactions: The Market DiscountsEverything• It’s not so much the news, but how themarket reacts to it. To understand how themarket interprets announcements,economic developments, or any otheroutside influence, price and volume areall you need to study.
Technical Analysis Tools
There are a variety of tools available intechnical analysis. Some you’ll want to use,others not. The important thing is to use whatyou feel comfortable with and what helpsyou best in determining your investmentdecisions.
Field Guide to Technical Chart Types
• Charts and Charting–Line graphs: Connect the dots byshowing the closing price of each timeperiod (hour, day, week, etc.).–Bar graphs: Show open, high, low,close.–Candlestick charts: Indicate high, low,close, plus they also display more ofthe emotional intensity between thebulls and bears. Very useful.–Point-and-figure charts: Display aseries of Xs and Os showing priceaction, bought and sold. Limited use.
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TECHNICAL ANALYSIS UNVEILED• Indicators–Moving averages: Lagging indicators thatconfirm a trend’s direction.–Oscillators: These help measure whetherthe market is overbought or oversold andare anticipatory in nature.• For more information:–www.candleeyes.co.uk/info.htm–www.litwick.com/about.html–www.stocksurf.net–www.candlecharts.com
What to Look For
Three main factors of charting techniques:Trend lines, support, and resistance.These will help you to spot:• Entry and exit points.• Initial stages of a breakout rally.
Support and Resistance
• Support: The price level at which a stockor index will receive considerable buyingpressure. Technical analysts believedemand at the support level will keep astock’s price from falling lower.• Resistance: The price level at which astock or index will receive considerableselling pressure. An increasing supply ofstock at resistance levels will prevent thestock or index from rising further.• Breakout: When a stock breaks throughthe resistance level, it’s called a breakout,a key component for a major up move.Traders look for this move as a signal tobuy, because those with long positions arenow making money.• Broken Support: When a stock tradeslower than the previous support level,supply (sellers) outstrips demand (buyers),which sends the stock or index lower.Lower prices sometimes create additionalselling pressure.
Figure 9R.1 Resistance BecomesSupport (Courtesy of Equis.com)
Figure 9R.2 Support BecomesResistance (Courtesy of Equis.com)
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An Easy Way to Remember Support,• Support: The floor you’re (hopefully)Resistance, Breakout, and Breakdownstanding on.• Resistance: The ceiling over your head.• Breakout: A stock going up with enoughforce to punch a hole clean through theceiling. Old resistance now becomes thenew support. Note: Sometimes after atrend line is broken, there will be areversal, albeit a short-term one. This isknown as trader’s remorse as the pricefalls (in a breakout) or rises (when a trendline has broken to the downside).• Break Down, or Broken Support: When astock breaks support, technicians look forthe next support level, which usually was,at some time or another, an old resistancelevel. The support level it just brokeFigure 9R.3 Support, Resistance, andthrough will be a resistance level if anda Breakout (Courtesy of Equis.com)when the stock turns around and headsnorth again.Trend Line—A straight line orparallel straight lines indicating thetrend in which a stock or index hasbeen moving.
Figure 9R.4 Rising Trend Line(Courtesy of Equis.com)
To draw:• Uptrend Line: Look for two or more lowpoints in the chart, and then connect themwith a straight line. This will indicate thesupport level. Think of this as a ballbouncing up a street. The height may vary,but each time it hits the support level itwill head back up; higher highs, higherlows.• Downtrend Line: Look for two or morehigh points and connect them. This willindicate the resistance line. Think of anenclosed staircase going down. With eachstep down, the ceiling above you getslower, too; lower lows and lower highs.• Examples:In Figure 9R.6, trend lines A and C arefalling trend lines. Note how they weredrawn between successive peaks. Trendlines B and D are rising trend lines. Theywere drawn between successive troughs inthe price (from www.equis.com/free/taaz/trendlines.html).
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Figure 9R.5 Falling Trend Line(Courtesy of Equis.com)
Figure 9R.6 Uptrends andDowntrends (Courtesy of Equis.com)
Good Buying Opportunities—Thereare definite signals investors look forin technical analysis.
Figure 9R.7 Breakdown (Courtesyof Equis.com)
Figure 9R.8Equis.com)
Breakout (Courtesy of
One of the most popular signals is thebreakout.A breakout describes a stock that has movedsideways for a period of time (called basing,or consolidation), then moves to and througha resistance level. For it to be a solidbreakout, look for:• Appreciable increases in volume:Indicates strong conviction.• Short Covering: If there is a short squeeze,the bears may be forced to buy their stockback, sending the stock up further.• Momentum Traders: These people pile onwhen a breakout occurs.Warning Signs• Divergence of Price and Volume: A stockmoving higher with decreasing volume isa good sign a pullback is near.• Trader’s Remorse: The second-guessingthat sometimes accompanies a breakout.The danger is that the breakout becomes afailed rally.
ROADMAP TO SUCCESSStrong Sell Signals or ShortingOpportunities
Figure 9R.9 Support Broken(Courtesy of Equis.com)
285Breaking Support: If a stock cannot holdsupport and begins to trend below a previoussupport level, look for the stock or index totrade down.• If volume accompanies the decline, this isa strong bear signal; people are losingmoney.• Sell stops or stop loss orders will kick in,too.• Traders who specialize in shorting stockswill pile on when a break down occurs.