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.
Thomas P. Mullooly, President of Mullooly Asset Management, LLC (http://www.mullooly.net ) has spent over twenty years in the investment industry, as a broker and as an investment advisor. Feel free to contact us to check out the relative strength of your portfolio by sending an email to firstname.lastname@example.org or visiting http://www.mullooly.net/403b-plan.html or sign up to receive the market report and tips on how you can soundly invest your money at http://www.mullooly.net .