The Trend Really Is Your Friend

I receive a lot of requests for my take on various stocks. Usually, these emails express some type of bias -- either bullish or bearish. But a surprising number of opinions are counter to the trend of the stock.

While it certainly can be profitable to go against the trend, the highest-probability trades are had by going with the trend. As the saying goes, the trend is your friend.

I measure trend by using the 20-period moving average. If I am looking at a daily chart, then it's the 20-day moving average. On a weekly chart, it's the 20-week moving average. This is the middle Bollinger Band, which defines the statistical middle of the trading range within the Bollinger Band complex.

If the price is trading consistently beneath the middle Band, then the trend will be down. Look for shorting opportunities off peaks or breaks of support. If price is trading consistently above the middle Band, the trend will be up. Look for long opportunities off pullbacks or breakouts. Those are the trades with the highest probability of success.

OK, let's get to the charts.

Centex

Centex (CTX - commentary - Cramer's Take) declined to $40, where it bounced last week. This level was where it peaked in June of 2003, and it took until October for it to break higher. So this level is a magnet for Centex.

The trade is to the long side in the short term, but I think the higher-probability trade would be to follow the weekly downtrend now. I'd wait for the stock to break below $40 and then go short. This would be in sync with the secondary indicators such as money flow and accumulation-distribution, which is just now evidencing the distribution that has been bringing the stock lower for the past few months.

D.R. Horton

D.R. Horton (DHI - commentary - Cramer's Take) is another stock that might be traded successfully to the long side in the short term. But the higher-probability trade is to wait and see if this head-and-shoulders pattern is completed.

I've clearly marked the pattern where the most recent high could only make it to the middle Bollinger Band, and to the same price level as the November/December 2003 high. That right shoulder is really bearish, because it coincides with a much lower peak in RSI and a flatlined accumulation-distribution line. Assuming the neckline is broken, D.R. Horton should drop an additional 20% before it finds any type of support. But wait for a break of the neckline. The way the stock is trading now, it could retest $30 first.

Sohu.com

Sohu.com (SOHU - commentary - Cramer's Take) is working on building a base from which to work higher. RSI just made a higher low, which adds to the bullish case. If you are long, consider setting a stop just beneath the support line drawn above.

But a bearish money flow and accumulation-distribution line indicate that sellers are still prevalent in this stock. Until Sohu trades back above $25, this stock remains in a downtrend. I think it's a bit late to go long but too early to short. But make no mistake: If Sohu rolls over at a lower level than $25, then that's your short entry.

Sina.com

Sina.com (SINA - commentary - Cramer's Take) is in the same group as Sohu, and the chart looks pretty similar. If this group continues to sell off, however, Sina has much further to fall, with $10 the next level of firm support. RSI is bouncing at the same level as the prior low. But because Sina made a lower low, this is a positive divergence, and it signals that the stock might have a bit more strength than the current price pattern otherwise suggests. Because of the sporadic volume, the accumulation-distribution line is quite erratic, but a look at the 20-day moving average shows a downtrend. So the A-D line is finally starting to confirm the rollover in price. I'd wait for Sina to roll over within the channel before shorting. A break above the resistance line would signal a reversal, but that's more than 30% higher from current levels.

Goodyear

Goodyear (GT - commentary - Cramer's Take) has been in a nice, steady uptrend. But over the past couple of months it has had trouble penetrating the $10 level. Buying pressure appears to have finally eaten through all the supply at that level last week, and the stock is now rolling along on the next leg higher. RSI is confirming the move, and it's a good sign that the oscillator is not yet overbought. That tells me the stock has more room to run before tiring.

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Still Too Much Bull in the Market

If you compare the recent move, from the middle of the second quarter to the present high, with the last move, from the middle of fourth-quarter 2003 to the peak in early 2004, you'll notice that the recent advance should be much more easily sustained because of a more gradual slope. As such, I think a long entry has a better chance of profitability now, with a stop just beneath $10.

Be careful out there.

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Dan Fitzpatrick is a freelance writer and trading consultant who trades for his own account. His columns focus on quantitative strategies for trading and investing. Fitzpatrick is a member of the Market Technicians Association and manages The Stock Market Mentor, a Web site focusing on the proper use of technical analysis for trading and investing. At time of publication, Fitzpatrick held no position in any stocks mentioned, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send your comments to [e-mail].