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200 DMA Violation Followed Earlier Warnings - Thursday, July 13, 2006
A very important technical tool that savvy investors have learned to incorporate in their technical analysis is the 200-day moving average (DMA) line. By the time a stock falls below its 200 DMA line, usually there will have already been some earlier technical sell signals. Like the 50 DMA, the 200 DMA also plays a pivotal role relative to a stock's price. If the price of a stock is above its 200 DMA then odds are that its 200 DMA will act as longer term support. Conversely, if the price is below its 200 DMA then the moving average acts as resistance. Obviously, if a technical breakdown or violation takes place on heavy volume it is a more serious concern. Sometimes quiet violations are repaired quickly without a lot of additional losses, however, the key moving averages are always important lines to watch. One should never ignore a 50 DMA or 200 DMA violation. Take any violation as a signal to re-evaluate a struggling stock and decide if certain other sell rules also apply to the situation at hand.
Universal Forest Products Inc. (UFPI -$0.81 or -1.35% to $59.41) again fell under its 200 DMA today. This former leader has performed poorly since at least one very obvious sell signal (its 50 DMA violation) was clearly noted on May 22nd, 2006 in that day's CANSLIM.net After-Market Update (read here). Since then its 50 DMA has changed from having an upward slope and turned lower. The company's group rating has fallen markedly, and the stock's Relative Strength rank has also fallen down to a mediocre 68. In a struggling market environment especially, the importance of heeding sell signals is frequently demonstrated, since 3 out of 4 stocks usually tend to move in sync with the broader market. Those odds are pretty bad odds to work against! In fact, of the 287 stocks presently included on the CANSLIM.net Leaders List, today there were only 28 up, 1 unchanged, and 258 down.
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Prior Highs Are Support - Friday, June 02, 2006
Another important factor is the relationship between an uptrend and a stock's pivot point. Typically, stocks begin forming an uptrend after rising above their pivot point. In the event the upward trend is violated, the stock will generally be expected to continue falling until it can retest support. Initial support is often the 50-day moving average (DMA) line, or its pivot point, whichever is higher. A range of prior resistance is also frequently a floor of support later, a level which can't be reached without first seeing some early sell signals.
Universal Forest Products Inc. (UFPI -$0.63 or -0.93% to $67.46) ended lower on below average volume on Friday. This stock was first featured on Monday, November 22nd, 2004 in the CANSLIM.net Mid Day Breakouts Report (read here) with the following note, "breaking out on big volume from a decent base." This stock was featured at $40.14 and, coincidentally, reached an all time high of $80.28, exactly double its featured price, a few weeks ago. During that time, UFPI enjoyed a rather orderly gain and it is currently tracing out a 5th stage base. It is imperative to note that risk increases in latter stage bases.
Further chart analysis leads to some interesting conclusions. It had several consecutive up days as it blasted to new highs above $60 in February; then it gradually edged higher, without much volume. On April 18th, 2006 it suddenly gapped up out of a 4th stage base-on-base pattern with gains on massive volume. It quickly jumped from the low $60's to the low $80's in a matter of a few short weeks. After such an impressive gain, this stock began pulling back alongside the major averages, and it saw several days of distribution in mid-May. It violated its 50 DMA on May 22nd, which is the higest volume down day anywhere on its daily chart. That was a technical sell signal. Now this pullback has managed to find support near its old highs, but the stocks is still lingering under its 50 DMA line. As long as this issue continues trading above its old highs and the longer term 200 DMA, the technical picture remains hopefull for an eventual rally attempt for new all-time highs. However, if this stock deteriorates further and rolls back into its prior base then the technical action starts to argue more strongly for selling any shares still being held.
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