A watchlist is a treasure chest – cultivate great stocks and wait for opportunities to present themselves. But every so often, great stocks turn into not-so-great ones.
What turns a good stock, bad? Among many things, two significant factors can be:
- The company fundamentals change
- A trending chart stops trending
Today, let’s focus on when a trending chart stops trending. Sideways charts are the worst to deal with – too many mixed signals and false breakouts/breakdowns. Personally, when I see a sideways trending chart, they are the first to be cut from a watchlist.
For example, here is a 10-year chart, and at first glance, price appears to be uptrending as the lows are making higher lows. We can draw a clean trendline touching the lows of 2009, 2012, and 2016 and as recently as 2019.
But is this an uptrending chart? A trend should be where the lows are getting higher, but the highs should be making higher highs. Sure, we can see how the price is making slow ascending levels. But let’s take a look at the rate of ascent. I’ve drawn the circles around the lows and the highs.
But to make things easier let us connect the circles, and we can start to see how the upper and lower channel lines are converging – creating a wedge, where the width is broader towards the left-hand side of this chart, and slowly narrows as we move towards the right-hand side of this chart.
While the stock is on my watch list, I would rather wait for a breakout either to the upside or downside as the price gets closer to the apex of the wedge. With that being said, I would want to keep following up on this chart to see how the story unfolds and how the price eventually breaks out – and more importantly, if there is an opportunity.