Judy is very good at what she does with respect to short term trading. I have seen evidence of her observation where if the technicals are getting worse on a stock as the price has broke through its 50 day MA and is rebounding off of its 200 day MA, further attempts should not be taken lightly as far as the potential downside goes. So you need to evaluate this with respect to the bigger picture privided by the other technicals and also its industry and the market.
Furthermore, if the stock has been a strong uptrending stock, and it hits and breaks through the 50 day MA, and then the price bounces off of the 200 day MA, many would expect the price to show strength, firm up and rechallenge the 50 day MA in the near future. If the stock continues to show weakness and even repeatedly retests its 200 day MA, this is a bad sign that more money will be leaving the stock. Once the big money starts leaving, that stock can move right through that 200 day MA like a knife through butter.
I think the idea of behind revalidation of a significant support as a sign of strength works over a longer time frame. If the stock came down to retest its 200 day MA and then moved with some velocity on the bounce and challenged its 50 day MA, this would be a sign of strength in a shorter time frame. Add to this the revalidation of the support over the longer time frame, and you would have good evidence of a strong stock under accumulation. However, if that support is tested multple times in short order, this may not be a good sign, particularily if the technicals of the stock are not getting any better.
Look closely at volume. On each successive attempt at the support, is there more volume to the downside and less to the upside? A bounce can be caused by the traders playing on the technicals of the stock. This action of money is very short term in nature with no lasting effect. Now if at the bounce large blocks of money were to move into the stock, this would be a diffferent story. Something has to happen before a stock's technicals can improve. The technical picture can only get worse for a stock that was in a good uptrend if it broke through its 50 day MA, tested its 200 day MA, and actually "hung around" its 200 day MA just to retest it. the stock having went below its 50 day MA is a bad sign in itself. And this certainly does not look good to the money that wants to be where the action is, particularily in this uncertain market.
So first look at the bigger technical picture that includes thee industry and the market. Second, look at how the stock behaves on the test of its 200 day MA. Does it demonstrate strength on the upside after its bounce? Is the technical picture still intact and even improving? For instance, what does the OB/OS indicators reveal about the stock? Are there signs of buying interest and accumulation in the stock?
Remember that nobody likes a laggard, particularily in this nervous market. There have been recent signs of sector rotation, and it takes time for money to wake up and move out of some stocks. Also look to see what its downside potential is below the 200 day MA.
Just some thoughts.
Bob Graham |
