We have received several questions about continuing downtrends and how to move into and out of plays. Below is a synopsis of what we are looking at in many of these plays. (February 11, 2003)
A continuing downtrend is one where a stock has broken an upward or lateral move, tested that breach, and is typically moving down the short term MVA (10 and 18 day MVA). Remember how stocks that breakout and move up in an uptrend tend to use the 10 and 18 day MVA as near support? They rally up then test those levels and then rally up again. 4 to 5 rotations is usually the max before a test down to deeper support at the 50 day MVA. If the move is going to continue the stock will jump back up on some volume.
In the downtrend it is just the oppossite, bouncing down and then rallying up to test the 10 or 18 day MVA and then falling again. In steep downtrends it will hold below the 10 day MVA, using that level as its resistance point. After 4 to 5 bounces down off of the short term MVA it will try to test higher to the next resistance level as the shorts cover up after a long downtrend and some value hunters come in.
We use these tests of the short term MVA in a downtrend as a good entry point for downside positions. We like to see the stock move up to tap that level and then roll over. That is a favorite downside entry point along with the initial test of the breakdown.
Currently the indexes are on what looks to be the third test of the short term MVA in the current downtrend. WE are looking for another playable move down from here, and as noted above, it could give a deeper and quicker plunge before moving back up for maybe the last test that could be much shallower. The Dow and SP500 are trying to make some support here at the recent lows, but with a lot of the action coming to a head at the end of this week with the UN inspectors and the terror threat before a long weekend (market closed Monday), the former seems more likely.
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