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.
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.
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.
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.
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.