Support System

When it comes to the stock market, birds of a feather certainly flock together. Under most circumstances, stocks in the same sector will move in very similar ways. For example, energy stocks will trade according to the more volatile oil markets (which often will be in the opposite direction of the greater stock market), while mining stocks will move with silver and gold, and consumer stocks will be more in-step with the larger economic climate. 

Take a look at charts for any two stocks from the same sector, whether it's two financial stocks, two retail stocks, or even two index tracking ETFs such as the SPY and the DIA, and you'll notice very similar, if not identical, patterns. Even when significant information, such as an earnings report, irrationally skews the trajectory of a particular stock in one direction or the other, other stocks from the same sector will tend to move in sympathy with that stock, at least until the market normalizes somewhat.

However, what's good for the goose is not necessarily always good for the gander and there are reasons as to why two stocks from the same sector cannot be traded in precisely the same ways. 

Let's examine the 5-Minute intraday charts for Goldman Sachs (GS) and JP Morgan (JPM), two of the world's largest investment banks. With such similar profiles, it's no wonder that these two banking giants made many of the same moves throughout the course of the day. In fact, the two charts below follow essentially the same pattern over the course of the four trading sessions shown.

As we can see in the chart above, GS opened on Friday, March 25th (white area at the right of the page) above the previous day's high just above $336 and enjoyed a healthy rally for the first couple hours of the trading session, before reversing course for most of the remainder of the day.

In much the same way, JPM opened strong and also rallied before reversing in the afternoon. Notice however that JPM's decline was less pronounced than GS's and it even gave not one, but two additional chances to buy near the early morning low that it made on the open. By contrast, GS made a lower final low towards the end of the session before enjoying a brief rally into the close.

So, how could this be? For one thing, no two stocks are exactly the same, so they're all bound to zig and zag in their own particular ways, even if they share many striking similarities. Furthermore, GS is a pricier stock than JPM, costing approximately twice as much per share than JPM. Because of this, you can account for more "slippage" with GS than you would with JPM, in which case an over-reaction through a reasonable low can be expected.

In this particular instance, the reason why JPM held the morning low and GS didn't likely comes down to one simple yet crucial distinction: While both stocks opened strong, above the previous day's close, and immediately ran up, JPM opened on a true gap, meaning that it opened above its high from the previous day. This is a sign of JPM being the stronger of the two stocks on this day, which is why it had less of an afternoon sell-off than GS did, was able to stay above the morning low, and had more rallying power in general.

With the stock market being in the midst of a healthy rally in the late stages of March following a pronounced sell-off earlier in the month, the technical trader can find numerous areas of support and resistance up and down the chart at which to make trades. This can result in a lack of confidence as one might come to question whether or not a point of entry makes sense when there are other reasonable areas at which to do business close by. In that case, knowing the general direction of the market will lend insight. In a strong market, you can usually buy the higher lows, and sell the higher highs. In a down market, the opposite strategy will make more sense. Both GS and JPM were acting fairly strong along with the overall market, in which case an argument could have been made for buying either stock in the afternoon against the morning low. But knowing that GS was the weaker of the two stocks simply based on how it opened (remember, JPM was on a gap while GS was not), as well as more prone to volatility, waiting for GS to approach the lower end of the range, while making a new low on the day, was more prudent. By the same token, JPM was the safer bet to find support above the day's low, which it did twice over the course of the afternoon.

Although certain stocks share similarities with others, each stock is unique in and of itself and not all areas of support (or resistance) are created equal in all situations. In order to determine the best place to enter a trade, the alert trader must consider a stock's individual qualities and circumstances, both technical and/or fundamental, in addition to the sector and general market direction, and should avoid relying on similar stocks as exact points of reference.