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February 13, 2000
The three important factors in stock investing are: what to buy, when to buy and when to sell. This week we deal with key support levels of stocks to determine if you should consider selling your position.
When a stock in your portfolio starts to show signs of pulling back from higher levels, you need to determine the overall weakness of this stock. Is it a short term pullback that will reverse and turn upward or is it a major slide that has no end in sight? To determine the answer to this question, you must first know the key support levels of your stock.
The short term key support level for your stock is the 50 day moving average (If you don't know how to find the 50 day moving average for your stock, click here). The 50 day moving average (MA) is the short term trend for your stock. Pullbacks are natural for stocks that are in an upward trend. Investors start to take profits causing a short term reversal in the trend of the stock. However, when your stock continues downward toward its 50 day MA, you are looking for the stock to find support at or above the 50 day MA. Support is defined as a reversal of the downward trend of the stock. If the stock can't find support at or above the 50 day MA and penetrates through it, then it is time to consider selling or lightening your position. Penetrating the 50 day MA doesn't mean that the stock still isn't a good long term investment, but for the short term it is to be watched very carefully. Strong stocks will usually find support at or above their 50 day MA and continue their upward trend after shaking off the short term profit taking.
The long term support level is the 200 day moving average. The 200 day MA is considered the long term trend of your stock. If your stock penetrates this support level, it is time for serious thought of selling. When the stock's downward price movement can't reverse the trend and breaks through this 200 day MA, it could be a very long time before the stock finds support and/or reverses the downward trend. It is time to put up the red flag on a stock that has penetrated its 50 day MA and is approaching its 200 day MA. Typically stocks that violate their 200 MA are considered "hands off" to most investors except for the "bottom fishers".
Take the time to check several stocks against their 50 and 200 day MA and look for similar patterns in the stocks that are falling in price or stocks that have currently reversed their downward price trends. By using charts and moving averages, you can help yourself determine if it is time to sell or lighten your positions.
How to find the 50 and 200 day moving average for your stock.
You can get all the charting and comparisons that you need through www.bigcharts.com. Big Charts is a free charting service and through their "interactive charting" link, you can select moving averages, indices and other stocks to compare the performance of selected stocks that you may be researching.
Here is the blow by blow:
- Go to www.bigcharts.com.
- At the top of the opening page, you will see an entry box for a stock symbol. Enter the stock symbol and click the "Interactive Charting" link.
- On this new page you will see the stock chart for your selected stock. In the left hand column of the new page, you will see a "indicators" link. Click on this link and you will now be able to compare your selected stock's performance to different moving averages. In the drop down menu under the heading "Moving Averages", select "SMA" and enter 50 or 200 in the box next to the drop down menu and click "Draw Chart". You will now see a chart showing the 50 or 200 day MA as you have selected.
Big Charts also offers a number of other indicators, comparisons and styles of charting that you may find helpful for your research. Good luck and have fun.
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