Dykstra: Buy In at the Floor

Just when we think stocks can't go lower, they do. Investors are all waiting for the floor -- or market bottom -- before jumping back in. Yet, this week we've seen stocks lose ground yet again.

Many industrials have been hit hard this week. Caterpillar(CAT Quote), which has won for me twice last year, bottomed Wednesday at $24.36, a multi-year low. Its competitor Deere(DE Quote), which was my pick for Wednesday, also fell.

And pharmaceutical stocks Pfizer(PFE Quote) and Novartis(NVS Quote) tumbled this week, hitting at least five-year lows. Even Cisco(CSCO Quote) is close to testing its one-year low of $14.20, set in November. When stocks get hammered this badly, they present a buying opportunity for my deep-in-the-money call options trading system, which has a win record of 95-1. What we should do when stocks hit their historical lows raises a technical-analysis question posed by a reader.

Can you explain support levels?

When you make any investment, it is important to buy on weakness or support, then sell on strength or resistance. Support is defined as the price level a stock typically will not break through on the way down. Resistance is the peak a stock will rise to, hitting investor resistance to go any higher.

Last fall, many stocks broke through their support levels. Now, with many stocks again trading at or near their 52-week lows, support levels are being challenged on a daily basis. Stocks such as General Electric(GE Quote) and RadioShack(RSH Quote) have broken through their support levels this week.

When GE plummeted Tuesday, the stock revisited prices (on a split-adjusted basis) it hasn't touched in over a decade. When a stock breaks through support, we look for the next level, which is calculated on a longer average or a multi-year low.