In my previous blog post here about how StarHub was such a good buy on 29th June at $3.70, I received a comment that M1 trading at $3.23 now might be a good buy too even though I have missed SH's boat.
However, I would like to explain in detail about the concept of price support levels and how it is important in investing.
1. What is 'Support' and 'Resistance' in stock price?
Pls see figure 1.
As quoted from Investopedia, "Support is the price level through which a stock or market seldom falls (illustrated by the blue arrows). Resistance, on the other hand, is the price level that a stock or market seldom surpasses (illustrated by the red arrows)."
2. Therefore, one should buy at Support level and sell at Resistance!
3. Why StarHub was a better buy than M1 at $3.70
SH price support level since 2014 was at $4.00. At $3.70, it has broken the price support level and it is a rarity to drop by 7.5% of this support level on 29 June.
On the other hand, M1 at $3.23 (current price now), this price support level was already broken through in June, before the greekexit crisis. On 29 June, M1 reached its lowest at $3.16, a drop of only 1.85% of its support level. At this price level, there is no 'rarity' in its pricing.
4. Time value of money
If I had bought SH at $3.70, it was as good as buying the same stock in June 2013, this was the selling price 2 years ago.
However, at $3.23 for M1 now, it is only as good as buying this stock in Jan 2014.
If both were to maintain the same earnings as compared to previous years, by 'time travelling' to the stock price of SH 2 years ago, it is a much better buy.
Conclusion:
Understanding Price support and resistance levels is useful when discerning when to buy and sell.
Market sentiments seem to regard SH as a better stock due to its stronger price support levels, although M1's financials might be better.
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