Each time the stock price came down from a previous high point it bounced off

Each time the stock price came down from a previous

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onward. Each time the stock price came down from a previous high point, it “bounced off” the Support Line. It took a nice bounce in July 2004, and then moved on to a new high. Then a series of bounces off the Support Line happened in August and September 2006, and again in January 2007, and one last time in July 2007. That was a heck of a Support Line on an upward-trending stock. Traders can make a lot of money on a Support Line like this one, betting the price will bounce up off it over and over again. I circled the point (see graph) where the three-year Support Line was broken for the first time—July 2007 at $90. That was the end of the
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Support for the Trend, and so the end of the Trend. From that point onward, anything could happen. It could have gone up or down from there. But often the end of a long Trend signals the beginning of a new Trend in the other direction … or the beginning of a Ceiling. In the graph, the top dotted horizontal line (#3) is a Ceiling Line. The Ceiling for BNI here was created by traders recognizing that a long Trend was broken at the $90 price point. The Ceiling begins in July after the $90 Support Line (#1) is broken (#2). Price points like this can become a kind of psychological barrier. Whenever the price gets near the $90 Ceiling, traders can get nervous and start to sell off. It has nothing to do with rationality. It’s just a sophisticated form of guessing, but if enough Big Guys are guessing the same way, the guesses turn out right over and over. After a few tests, the Big Guys get it in their heads that $90 is like the third rail. If you buy at $90 you get fried, so don’t touch it. When that happens, $90 becomes a Ceiling. By October, when the price reached the Ceiling, there were no buyers. Just sellers. In this case, the BNI stock price was swinging between $75 and $90 a share from July 2007 to March 2008. A big event can break a price through a Ceiling. In this case, the big event in late March, early April 2008 was the news of Warren Buffett’s yearlong purchases of BNI. Mr. Buffett used this psychological barrier,
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this Ceiling, as an opportunity to buy without sending the market into a buying frenzy. Mr. Buffett began buying at $79 and kept buying right through $84, and the whole time he was buying 10 percent of the business, the price stayed under the Ceiling. Finally the news in March 2008 that Mr. Buffett was in BNI big-time overcame the third-rail psychology and the stock price broke through the $90 Ceiling and started to run up (#4). As the price broke through the Ceiling, we naturally wanted to know how far it was going to go before it stopped going up. Notice that from September 2006, when the price was at $66 , to October 2006, when it hit $80 and dropped back, the price moved the distance from bottom to top in about two months, and the price increased about $14. The next run-up started in January 2007 at $74. Back then, if we were to calculate the distance it might run up before it stalled, we would have estimated that it would run about two months, like the previous time, and, according to our Support and Resistance Lines, the new high would peak around $90 two months later in March. What actually happened
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  • Warren Buffett

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