While it's nice when a stock bounces off an already drawn trendline, they aren't perfect; therefore, giving a bit of leeway around the line is recommended. Also, when a trendline is broken it doesn't necessarily mean the trend is over. The whole picture needs to be looked at to determine if a trade is warranted in the trendline area or not. These stocks have respected their trendline support in the past, and another test is occurring now. 

Micron Technologies (Nasdaq:MU) has been moving in a trend channel since August, and is currently testing the low near $24. The recent rally, and high of $25.68, didn't make it to the top of the channel, indicating a bit of relative weakness compared to prior moves, but not enough reason to avoid a trade. One potential entry point is between $24 and $23.50 with a stop below $22.30. A close above $25.15 indicates a re-test of the high. If that is surpassed, the initial target is $26.75 to $27. Beyond that, the top of channel intercepts near $28.

Micron Technologies (Nasdaq:MU) has been moving in a trend channel since August, and is currently testing the low near $24.

Lloyds Banking (NYSE:LYG) has formed a triangle pattern as it consolidates between the recent high at $5.76 and the upward trendline intersecting near $5.30. Buying near $5.30 with a stop below $5.20 is one option. Another is to wait for an upside break of the triangle at $5.58. The former gives a better entry price, while the latter provides a bit more confirmation the current pullback has ended (but still no guarantees of course). In either case, the target is $5.99 to $6.04.

Lloyds Banking (NYSE:LYG) has formed a triangle pattern as it consolidates between the recent high at $5.76 and the upward trendline intersecting near $5.30.

HCA Holdings (NYSE:HCA) is approaching trendline support at $49 to $48, depending on how the lines are drawn. A deeper pullback into $46 is quite plausible though, given the stock could barely make a new high on the last run. Therefore a resistance area around $52 remains in tact. In instances like this, it is often better to let another price wave occur before deciding what to do (if anything). If taking a trade near the trendline, keep risk small due to the potential for a deeper pullback. If the price holds the trendline and then rallies and closes above $52.49, that's another entry opportunity with a target at $57.

HCA Holdings (NYSE:HCA) is approaching trendline support at $49 to $48, depending on how the lines are drawn.

Gilead Sciences (Nasdaq:GILD) at first glance looks to have a similar setup as HCA Holdings. While a new high was recently created at $84.88, this was in the vicinity of the former high, indicating a resistance area is still there. There is a precedent for this though. In November through January, the stock was continually stalled just above $75, but the trendline held on pullbacks. While not a crystal ball, it does show buyers are willing to hold the stock even when it fails to make significant progress on a number of attempts. Given the stock's price, the entry area can be large--between $80 and $77, with a stop below $75. Target is $87.70, which is near a trend channel top. 

Gilead Sciences (Nasdaq:GILD) at first glance looks to have a similar setup as HCA Holdings.

The Bottom Line

Trendlines can help spot potential trade opportunities, but the overall context should be considered before trading off them. Trendlines often need to be redrawn, and rarely does price stop exactly at a trendline. Rather, it may over or undershoot. Use the trendline to highlight a potential area of interest, and then look for an entry point that sets up a trade in alignment with the trend, and which offers a reward to risk ratio which justifies the trade.

 

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

Related Articles
  1. Trading Strategies

    Who Actually Trades or Invests In Penny Stocks?

    Although penny stocks are highly speculative, millions of people trade them daily. Here are 10 different types who do.
  2. Chart Advisor

    4 Stocks Still Flashing Buy Signals

    In the midst of volatility and a big market sell-off last week, these stocks are flashing buy signals.
  3. Technical Indicators

    Understanding Trend Analysis

    Trend analysis is the use of past performance to predict future price movement of a security.
  4. Trading Strategies

    How To Buy Penny Stocks (While Avoiding Scammers)

    Penny stocks are risky business. If want to trade in them, here's how to preserve your trading capital and even score the occasional winner.
  5. Chart Advisor

    Value Stocks Offer Stability in a Volatile Market

    With volatility on the rise, investors are turning to segments of strength such as value stocks. We'll take a look at several ETFs that could be worth a closer look.
  6. Chart Advisor

    Stocks to Short...When the Dust Settles

    Four short trades to consider, but not quite yet. Let the dust settle and wait for a pullback to resistance for a higher probability trade.
  7. Technical Indicators

    Using Moving Averages To Trade The Volatility Index (VIX)

    VIX moving averages smooth out the natural choppiness of the indicator, letting traders and market timers access reliable sentiment and volatility data.
  8. Chart Advisor

    Strategizing for a Market Fall...or Rally

    The downtrend isn't confirmed yet, so be prepared with trades for whether the stock market rallies or continues to fall. Here's how to do it.
  9. Trading Strategies

    Are You a Trend Trader or a Swing Trader?

    Swing traders and trend traders execute market timing strategies that require different skill sets.
  10. Technical Indicators

    Detrended Price Oscillator Trading Strategies

    The detrended price oscillator (DPO) offers a simple approach to cycle analysis, removing momentum and long-term trends from the equation.
RELATED TERMS
  1. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  2. Indicator

    Indicators are statistics used to measure current conditions ...
  3. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  4. Mass Index

    A form of technical analysis that looks at the range between ...
  5. Money Flow Index - MFI

    A momentum indicator that uses a stock’s price and volume to ...
  6. On-Balance Volume (OBV)

    A momentum indicator that uses volume flow to predict changes ...
RELATED FAQS
  1. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  2. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>
  3. How do you know where on the oscillator you should make a purchase or sale?

    Common oscillator readings to consider making a buy or sale are below 20 or above 80, respectively. More aggressive investors ... Read Full Answer >>
  4. What are the alert zones in a Fibonacci retracement?

    The most commonly used Fibonacci retracement alert levels are at 38.2% and 61.8%. A 50% retracement level is also commonly ... Read Full Answer >>
  5. How was the Fibonacci retracement developed for use in finance?

    The use of Fibonacci retracements in stock trading was popularized by noted technical analysts W.D. Gann and R.N. Elliott. ... Read Full Answer >>
  6. How was the stochastic oscillator developed?

    The history of the stochastic oscillator is filled with its own controversies and inconsistencies. Most financial resources ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!