One of the most quoted "rules" of trading is to trade with the trend. Whether long-term or short-term trading, a trending price is where money is generally is made. When the short- and long-term trends are moving in the same direction, it is an especially favorable time to trade as traders on multiple time frames buy up the stock. Four big name companies are in uptrends over the last year, but are showing great upside movement over the last month as well. This price action creates two trendlines. The trendlines from different time frames can be used to for price projections, risk management and entry points.
SEE: The Utility Of Trendlines
Anheuser-Busch InBev (NYSE:BUD) has been in an uptrend since September 2011. That uptrend will remain intact until the price falls below the rising trendline, currently intersecting at $69. Since June, the stock has been pushing aggressively higher creating a short-term trendline. The short-term trendline intersects at $79, very close to the August 2 swing low of $78.90. Therefore, a drop towards this area presents a short-term buying opportunity. If the price continues to drop below it, though, the price could decline all the way to the next trendline support at $69. How much upside potential is left in the stock is questionable. A trendline along the price peaks since August 2011 indicates the price could peak near $85, then pullback. Also, the stock made a 52-week high at $84.05 on August 1 on very high volume. The stock will need to get back above the 52-week high to keep the trend going. Pullbacks toward the trendlines present low risk trading opportunities; a stop order can be placed below the trendline and a price target above $84 used.
Target Corp. (NYSE:TGT) has been in an uptrend since August 2011, yet there are recent trends which are more useful. The main trend for Target began in 2011, and the trendline currently intersects at $59. A drop below that level and the uptrend is drawn into question. A shorter term trend began in early July, as the stock put in multiple 52-week highs - the most recent being $62.91 on August 7. The short-term trendline intersects at $60.70. If the price drops through the short-term trendline, it could likely correct to the longer term trendline. A pullback towards either trendline has trade potential. Stops can be placed below the trendline being used, with a price target above $62.91. Extrapolating prior moves, if the uptrend continues the price could reach $65 over the next couple months.
The dominant trend in Time Warner Cable (NYSE:TWC) began in late November 2011. That trendline currently intersects at $80, providing support, but a drop below it signals a downtrend could already be underway. A short-term trendline can also be drawn, starting from the June low, which has a steeper angle of ascent. This steeper trendline provides support at $84.25, but if broken the stock could fall to the dominant trendline. Pullbacks to either trendline present trading opportunities with a target near $93. The target is based on extending the current trend channel out to the right on the chart. Stop orders for this type of trade are generally placed just below the trendline being used for the entry signal, or below a recent swing low in price.
SEE: Technical Analysis: Support And Resistance
Since the start of the year, Discover Financial Services (NYSE:DFS) has been trending higher with the trendline currently intersecting at $34. A drop below the line indicates a downtrend may be underway and lower prices could be forthcoming. Along the swing lows since June, another trendlines can drawn. The angle of ascent is not much steeper than the dominant trendline, but it does provide alternative entry and stop levels. Currently, the stock is trading near the top of a small trend channel, so a pullback could occur shortly. Pullbacks towards either trendline are tradable, with a stop below the trendline being used for the entry signal. Based on the trend channel the stock is currently in, and assuming the overall trend continues, the price target is $39 for the next push higher.
The Bottom Line
Usually there is more than one trendline present when a stock is trending. The dominant trend is good for seeing the overall direction of a stock on the medium to longer term. Shorter term trendlines isolate the waves within the dominant trend and can be used for lower risk entry and exit levels. Trend channels created by the trendlines can be used to estimate price targets. Trading opportunities arise when a stock pulls back to the trendline and then bounces off it, moving higher once again. The downside of trendlines is that the price may not always stop exactly at the trendline, or may drop below it only to rally back above it a short time later. Therefore, always control risk and make sure there is enough profit potential in a trade to warrant the risk.
Charts courtesy of stockcharts.com
At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article.