Apple, Inc AAPL, Advanced Micro Devices, Inc AMD, and Tesla, Inc TSLA are all trading higher in strong downtrends. A downtrend occurs when a stock consistently makes a series of lower lows and lower highs on the chart.
The lower lows indicate the bears are in control, while the intermittent lower highs indicate consolidation periods. Traders can use moving averages to help identify a downtrend, with descending lower timeframe moving averages (such as the eight-day or 21-day exponential moving averages) indicating the stock is in a steep shorter-term downtrend and descending longer-term moving averages (such as the 200-day simple moving average) indicating a long-term downtrend.
A stock often signals when the lower low is in by printing a reversal candlestick such as a doji, bullish engulfing or hammer candlestick. Likewise, the lower high could be signaled when a doji, gravestone or dragonfly candlestick is printed. Moreover, the lower lows and lower highs often take place at resistance and support levels.
In a downtrend the "trend is your friend" until it’s not and in a downtrend, there are ways for both bullish and bearish traders to participate in the stock:
- Bearish traders who are already holding a position in a stock can feel confident the downtrend will continue unless the stock makes a higher high. Traders looking to take a position in a stock trading in a downtrend can usually find the safest entry on the lower high.
- Bullish traders can enter the trade on the lower low and exit on the lower high. These traders can also enter when the downtrend breaks and the stock makes a higher high, indicating a reversal into an uptrend may be in the cards.
The Apple Chart: Apple confirmed it is trading in a downtrend on Friday when the stock printed a lower low under the Feb. 14 low-of-day at the $166.56 mark.
- The most recent lower high was formed at the $173.44 level on Feb. 16 and bearish traders will be watching to see if Apple prints a reversal candle below that level on the next bounce higher to indicate the downtrend is likely to continue.
- Bullish traders will want to see big bullish volume come in and push Apple up above the $174 level, which would negate the downtrend.
- Apple has resistance above at $167.88 and $171.03 and support below at $162.14 and $157.46.
(Click on image to enlarge)
The Advanced Micro Devices Chart: Like Apple, AMD confirmed a downtrend on Friday when it printed a lower low below the Feb. 11 low of $111.81.\
- On Friday, AMD printed a doji candle, which is a sign a reversal to the upside may be in the cards. Bearish traders will be watching for AMD to top out below the most recent lower high at the $121.88 mark.
- Bullish traders will want to see AMD push up over the $122 level, to indicate the downtrend has been negated.
- AMD has resistance above at $118.13 and $122.49 and support below at $112.61 and $106.99.
(Click on image to enlarge)
The Tesla Chart: Tesla began trading in a downtrend on Feb. 11 and has printed a consistent series of lower highs and lower lows, although volatility in the stock has recently been waning.
- Tesla’s most recent lower high was printed on Feb. 16 at the $926.43 mark and when the stock bounces bearish traders will be watching for Tesla to form a bearish reversal candlestick below that level.
- Bullish traders will be watching for Tesla to print a higher high above $927 to negate the downtrend.
- On Friday, Tesla printed a hammer candlestick on the daily chart, which indicates a bounce to the upside is likely on the way.
- Tesla has resistance above at $877.95 and $900.40 and support below at $821 and $780.79.
(Click on image to enlarge)
Comments
Log in or sign up to join the conversation.