Page 1247 - How to Make Money in Stocks Trilogy

Don’t Invest Blindly: Use Charts to See the Best Time to Buy and Sell 229

The Trend Is No Longer Your Friend

Take another look at the weekly charts for OpenTable and Fossil—and
recall what we learned earlier about support and resistance.
In the months leading up to the sharp sell-off, both stocks had been mak-
ing a relatively steady upward climb, finding nice support at their 10-week
moving average lines.
Do you see how that changed when the stocks suddenly made those
exceptionally sharp declines on unusually heavy volume? Don’t ignore such
a change in trend—it’s usually a sign of even more trouble ahead.

■ ✔ Sharp drop below 50-day moving average line on heaviest
volume in months

As we saw in the section on support and resistance, professional investors
often use the 50-day moving average line as a key benchmark. That’s why it’s
so important to watch how a stock behaves when it trades near that line.

• If the stock stays above the 50-day line, that means professional investors
are stepping in to support the stock and protect their positions.
• If the stock crashes sharply below the 50-day line on unusually heavy vol-
ume, that could mean institutions are reducing their holdings, and more
selling will follow.

A drop below the 50-day line does not necessarily mean you should auto-
matically sell your entire position. However, it is a definite warning sign,
particularly if the stock:

• Slices sharply below the line (especially on a huge gap down)
• Closes at the very bottom of the day’s price range
• Declines on unusually heavy volume

Also, if the general market is weakening and the Market Pulse outlook has
changed to “Uptrend under pressure” or “Market in correction,” that’s all
the more reason to take defensive action and protect yourself.
Next is an example of a heavy-volume drop below the 50-day line.