Page 1186 - How to Make Money in Stocks Trilogy

Don’t Invest Blindly: Use Charts to See the Best Time to Buy and Sell 169

Support or Resistance at 10-Week
or 50-Day Moving Average Line

It’s very important to watch how your stock behaves around the moving
average lines—particularly the 10-week line on the weekly chart and the 50-
day line on a daily chart. The reason is simple: Professional investors use
these lines as key benchmarks. So you can see if fund managers and other
big players are supporting or selling the stock by watching how it behaves
around those key moving average lines.

• Support: If institutional investors still have a positive outlook on the
stock, they’ll often step in to buy more shares and protect their positions
when the stock pulls back to or dips below the moving average line.
In that scenario, you’ll typically see the stock pull back to the 50-day or
10-week line on light volume (showing that institutions are not selling
aggressively), then bounce back above that line on heavy volume (show-
ing that fund managers are stepping in to buy more shares).
• Sell-off: If the stock fails to find support at the benchmark lines and
crashes below them on heavy volume, what does that tell you? That big
investors may now be less interested in shoring up their positions and
more interested in just getting out of the stock.
Again, the key is to watch the volume: If trading is particularly heavy as
the stock breaks through the moving average line, that’s a definite warn-
ing sign. If volume is light, it could mean the selling is less serious.

As you can see in the following chart for F5 Networks, it’s not unusual for
a stock to move below the 10-week or 50-day moving average line for a few
days or weeks, even as its overall trend is still headed higher. So a drop
below one of these key benchmark lines does not mean you should auto-
matically sell the stock. We’ll talk more about that and specific sell signals in
the Selling Checklist.