If you’re passionate about the stock market, you probably know something about trends. Indeed, “The trend is your friend,” is the mantra of intraday traders, swing traders and active investors, alike.
For sure, the trend can be your friend—and can deliver great gains–as long as you know how to analyze it with at least a minimal degree of accuracy. To earn sweet profits from a stock’s price uptrend, you’ll need to be able to identify when a uptrend begins and how to monitor its subsequent moves to make sure it fulfills your uptrend criteria. And since markets don’t climb higher forever (see my last article), wise traders and investors will want to keep their gains safe by recognizing signals that tell them when the trend is about to end.
An “uptrend” takes place on a price chart when a stock, ETF, or other asset rises in a series of higher (price) lows and higher highs. (We define a “downtrend” when a price chart displays a series of lower highs and lower lows.)
The strongest stocks, representing muscular companies, can remain in uptrends for several months to several years.
That’s all good… but when does an uptrend . . . end? The trend ends when the upside price momentum slows to a stop, falters and then slides down to a price that is lower than the previous low price on the chart.
In other words, after a period of time (the uptrend), buyers finally refuse to pay higher prices for the stock. For the time being, they jam their hands into their pockets and declare “Game Over. We’re not paying anymore for this stock.”
At this point, a portion of these shareholders always decide to sell. When no one appears to buy the shares at the current price, the sellers have to lower their price to exit their positions. If buyers are few and far between, panic accelerates the selling, and price plummets faster. When or if price tumbles below the prior low on the chart, the uptrend officially becomes a downtrend.
On this weekly (every candle represents one week of price action) chart of the Priceline Group, Inc. (PLCN), we can see how price traded sideways during the basing action during the last half of 2012 (black arrow). Then demand became stronger, and bulls took the Internet travel company into an uptrend, creating higher highs and higher lows, into the first quarter of 2014 (green arrow).
Priceline Group, Inc. (PCLN) Weekly Chart
Chart courtesy of RealTick®
Although traders and investors could have profited from entering the stock in most of the year, for those trend savvy players who entered Priceline in the early part of 2013, and stayed in until January or February of 2014, it was a delicious treat, indeed, bringing home about 100% profit!
As a side note: For those of you who have analyzed my choice of the “lower low” and possible profit-taking point on this chart, please know that I use the stock’s closing price to determine high and low points—not intraweek prices. This strategy keeps me from exiting positions prematurely. With this in mind, I pinpointed the long red candle during the week of October 5th (red arrow) to be responsible for the trend-break from uptrend to downtrend. Still, I would have taken profits earlier in the year, as Priceline could not make a “higher high”—part of our uptrend definition and a signal that buyers were jamming their hands in their pockets.
Savvy traders and investors who hold a basic knowledge of uptrends, how they form, and how to manage risk and even take profits when they falter, can enjoy the trend as their friend, and ride these “profits to stairways,” over and over again!
Until next time, keep green on your screen!
Toni Turner is the President of TrendStar Group, LLC, is an accomplished technical analyst as well as a popular educator and sought-after speaker in the financial arena.
She is also the author of best-selling books: A Beginner’s Guide to Short-Term Trading, Short-Term Trading in the New Stock Market and Invest to Win: Earn and Keep Profits Bull and Bear Markets With the GainsMaster Approach, co-authored with Gordon Scott, CMT.
Toni is also creator of How to Bottom Fish Like a Pro, an online investing course that teaches you how to find down-and-out stocks that are poised for an explosive surge to the upside.