Apprenticed Investor: Stop-Loss Breakdown
On the other hand, buying a stock right above support, with a stop just below, offers good risk/reward potential. Downside is limited to a few points, while upside may be substantial.
When a stock is rising, its moving average will rise, albeit at a lag. Once the stock begins to falter, its price will fall much faster than the moving average. When the share price crosses the average to the downside, that's a very powerful sell signal.
Since the market peaked in March 2000, every major disaster -- from Lucent (LU) to Global Crossing to WorldCom -- has given clear 200-day moving average sell signals.
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