A very important technical tool that savvy investors have learned to incorporate in their technical analysis is the 50-day moving average (DMA) line. The 50 DMA line plays a pivotal role relative to a stock's price. If the price of a stock is above its 50 DMA then odds are that its 50 DMA will act as formidable support. Conversely, if the price is below its 50 DMA then the moving average acts as resistance. Healthy stocks sometimes trade under their 50 DMA lines briefly, but usually a strong candidate will promptly bounce and repair a 50 DMA violation. When a stock has violated its 50 DMA line and then lingers beneath it, the stock's outlook gets worse and worse as it spends a greater period of time trading under that important short-term average line. Once the 50 DMA line starts sloping downward it should also be acknowledged that the stock has been struggling for a while, and it might be time to reduce exposure and look for places to put that money to work in stronger buy candidates.
Transocean, Inc. (RIG -$1.86 or -1.32% to $142.52) ended lower on its 5th consecutive session for its worst close since April 3, 2008, and it is now in negative territory year-to-date (YTD). It has been continuing to struggle after recently violating its 50 DMA line and falling back into its prior base. It actually enjoyed a +46% rally from its January 23rd low to its May 19th high, helped by the strong advance in crude oil prices and leadership in the industry group. RIG sports strong ranks; its Earnings Per Share (EPS) rating of 98 and Relative Strength (RS) rating of 87. This stock was recently featured on Friday, May 16, 2008 in the CANSLIM.net Mid Day Breakouts Report (read here) with a $160.40 pivot point and a $168.42 maximum buy price and the following note: "Y - Gapped up to start the 2 latest sessions, rallying from support near its 50 DMA line and earlier chart highs that were a resistance level near $145, now approaching all-time highs. It has high ranks and a great earnings history. It found support near its 200 DMA line and rebounded impressively since, based on weak technical action, it was dropped from the Featured Stocks list on 1/17/08. Featured in yellow in the 11/01/07 CANSLIM.net Mid-day Breakouts Report (read here)."
Before taking action, disciplined investors will watch for the stock to repair the recent technical damage which requires gains and a breakout backed by at least +50% above average volume above what would be considered its new pivot point at $163.10. Remember to always limit losses per the 7-8% sell rule, and never hold a stock if it falls more than that from your purchase price.
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It is not uncommon for leading stocks to pull back after breaking out. Ideally, volume is lighter when the stock retraces back toward a chart support area such as prior chart highs, an upward trend line, or a key moving average such as the 50-day moving average or 200-day moving average. Violations of those technical support levels are a concern, and they are a much greater concern when they occur on higher than average volume. It is especially worrisome when the volume on the down day exceeds the above average volume which had accompanied the prior gains.
Transocean Inc. (RIG +$4.50 or +3.70% to $126.28) rallied toward recent highs with a considerable gain on below average volume Friday. It recently has been testing support near its 50-day moving average (DMA) line. This stock was first featured on Thursday, November 1, 2007 in the CANSLIM.net Mid Day Breakouts Report (read here) with a $118.05 pivot point and a $123.95 maximum buy price. This high-ranked leader rallied +11% in the first 5 days after it was featured. After its initial sprint higher, RIG pulled back, briefly undercut its pivot point, and promptly found support near its 50 DMA line. Normally institutional support helps healthy stocks stay trading above their 50 DMA lines, but a breach of that important moving average can be considered a technical sell signal - especially if heavy volume leads to a considerable loss and a 50 DMA violation.
The market is currently in a correction which emphasizes the importance of waiting for a new follow-through day to be triggered before accumulating stocks. Remember that 3 out of 4 stocks follow the market, and the odds of success are highest when the market is in a confirmed rally. Investors should keep RIG on an active watchlist while waiting for the market to enter a new confirmed rally.
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