Seven Reasons Why The Trend Is Your Friend
We spend a great deal of time trying to spot stocks heading in
the right trend, or direction. Careful attention needs to be
given to the support and resistance lines. These lines are also
called trend lines. Here are seven reasons why the trend can be
your friend in investing:
1. These lines draw the general trend, or direction, the stock
is heading. They're not used for daily tracking, they're more of
a longer-term direction that the stock, mutual fund or commodity
is heading. If you are using a longer term approach, the trend
is what you really want to know, not necessarily the day to day
wiggles in a stock.
2. Often times, the trend line will give you guidance in a stock
for years, not just weeks or months. But these support and
resistance lines are often bumpers, or guardrails, along the
way. Stocks often drift toward their support or resistance lines
and then bounce back in the opposite direction.
3. If you can pick off a stock you find attractive as it is
bounces off the support line, it could be a terrific time to
buy. The reason is you have a strong, logical place for your
stop point...just under the support line, which is really close
by. This helps minimize the amount you have at risk.
4. Some of the best winners come from stocks that are purchased
just as the stock breaks through overhead resistance and forms
new patterns. Holding the stock until it breaks support line
(which might be possibly many months, or even years later) can
really help your overall performance!
5. The reasons behind why a stock jumps through a brick wall are
often not clearly visible. The reasons for the move may emerge
days or weeks (or even a year!) down the road. But when a stock
or a mutual fund breaks through the trend line, either up or
down, it's important news.
6. If a stock or mutual fund we are following breaks through
it's overhead resistance, we have a high level of confidence
that the stock will continue to climb upward.
7. Lastly, if the support line of your mutual fund or your stock
is broken, beware! This is a very clear signal we should
consider selling a portion (or maybe even the entire) position.
Breaking the support line is the ultimate sign that supply is
now clearly in command. Your principal is now at risk.