Watching The 50
How do leading stocks behave around
their historic support levels? John Hancock Financial Services appears to be
acting constructively around its 50-day moving average, a precedent support area for the new issue.
The eye of the novice chartist tends
to move immediately to the most recent price action of a stock in search for the
bullish or bearish pattern. However, the most powerful factor for the
intermediate-term trader is the long-term trend. You want a stock that has
established a powerful uptrend, the longer the better. With older issues, you
want as many months as possible trading above a rising 200-day moving average.
With younger issues, I look to the 50-day. A high-momentum trade candidate can
breach these briefly, but it should find support and resume above them after
normal corrective action.
John Hancock
(
JHF |
Quote |
Chart |
News |
PowerRating) seems to fit
the bill as you can see in the accompanying chart. The stock got a bit ahead of
itself after clearing a five-week correction-recovery zone on Dec. 12, but the
subsequent correction appears to have bottomed above the old zone’s resistance
at 32. Prior resistance, once breached, becomes support: That’s constructive.
Now let’s see if the stock can form a
right-side recovery on strong volume. The relative strength line needs work as
well. Ideally, the RS line will take out its prior high on or before any
breakout play.    Â
The top field of all charts in this
commentary uses a logarithmic price scale and displays a 50-day price average in
red. In cases where the displayed security has traded long enough, the top field also
will exhibit a 200-day moving price average in black. In the second field, a
blue relative strength line represents the displayed security’s price
performance relative to the S&P 500. The third field displays vertical daily
volume bars in black with a 50-day moving average in blue for volume.
All stocks, of course, are risky. In
any new trade, reduce your risk by limiting your position size and setting a
protective price stop where you will sell your new buy or cover your short in
case the market turns against you. For an introduction to combining price stops
with position sizing, see my lesson,
Risky Business. For further treatment of these and related topics,
check out the Money
Management area of TradingMarkets’ Stocks Education section.