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The Power of Support

Jun 14, 2017


We tend to think of a mistake as something we did wrong, but when it comes to investing, the opposite is often true. The biggest mistake I see investors make is not what they do wrong but what they don’t do at all. A lot of people are afraid to buy into strength because they think they’ll buy at the top, but those same people are also afraid to buy into weakness because they are afraid stocks will fall further.

The result? They’re not in the game, frozen in a holding pattern as they wait for the “right time” while the market and many stocks continue to hit new all-time highs.

We all hate the thought of losing money, so I get how hard it is to put emotions aside when it comes to investing. This is where the charts are so critical. They let you see under the hood of the market and individual stocks, and they don’t lie. You can see where buyers are buying and sellers are selling, as well as trends that keep rolling on and trends that break down.

This all came up again beginning last Friday when the big-name technology stocks that have led the market rally started rolling over. Digging below the headlines provided an invaluable perspective – as it always does – and in this case the takeaway is that it is a great time to take advantage of buying opportunities in NexGen stocks.

We can make that determination with confidence because of the idea of support, which can only be seen by looking at charts. That’s why I incorporate chart analysis into both my shorter-term trading and my longer-term investing.

When stocks are in the midst of a bear market, the term support is used often as investors look for a bottom. When will they find support? Or, in other words, when will they stop falling? On the way up, which is where we have been for some time now, investors focus more on resistance as they look for the top. By ignoring support in a rising market, you miss out on a critical part of analysis that helps determine both buy and sell signals.

When the NASDAQ fell sharply last Friday, there was plenty of worry that it was the beginning of a correction for technology stocks. But I had already determined support levels for the index, so instead I saw a healthy pullback and buying opportunities. Specifically, the NASDAQ’S uptrend line at 6,100 and the 50-day moving average, two key support levels, were never breached, and thus the short-term uptrend remained intact.

Analyzing Support

I get asked a lot about support, so let’s talk for a moment about what it is and how to use it. Support on a chart is an area that has been a floor in the past for a stock or index, or a price area that has historically attracted buyers, thus creating said floor. You might look a little silly doing this, but try jumping up and down a few times. When you come down you hit the floor, and it’s always at the same level. But if you were to fall through the floor (don’t try this at home, as they like to say!), you would continue falling until something supported you again, most likely the next floor down.

Support is one of the most important things I analyze in every stock I already own and in every stock I am considering buying. I want to see support hold in stocks I own because a break below often results in a steeper fall down to the next support level. For stocks I want to buy, I love to get in when they pull back near strong support but don’t breach it significantly. This is often an ideal entry point. Buying just above support gives you maximum upside potential and lowers risk because downside is limited.

There are many ways to analyze support, so let me tell you about three of the biggest ones:

Price support, as the name states, is a level that is created by a stock’s price action and can be determined by a number of factors. For example, it could be a price that the stock has pulled back to multiple times and then rallied off of. Or it could be an old resistance level that a stock has broken above and is now acting as support. Either way, price support is a level that a stock should hold amid any pullback and is important in keeping an uptrend intact.

Trend line support is a rising line that connects a series of higher lows within an uptrend and acts as a floor on all healthy pullbacks. You can see a good example of this with the black line I’ve drawn on the NASDAQ’S chart above. A breach below the trend line will often signal the end of the uptrend.

Moving averages are incredibly helpful indicators that many times also act as support. A moving average is basically the average closing price over a specified number of trading days – so the 50-day average would be the average closing price over the last 50 days, and so on. Generally speaking, the most important moving average is the 50-day, but I also look at the 200-day for longer-term support and the 20-day for stocks that are moving sharply higher. Keep in mind that there is no magic moving average. The one that acts as the most accurate support varies from stock to stock, and once again, we need the charts to determine which one is best.

Support in Action

To see exactly what I’m talking about in terms of support, the overall market and why the recent weakness is a buying opportunity, I would like to share with you the video chart analysis I prepared for my readers in yesterday’s NexGen Trader issue. Click on the chart below to watch the video or view it again as a refresher:

By the way, I will be hosting a live event next week for my subscribers in which we’ll analyze all kinds of charts, from the market to recommended stocks to potential buys. I’ll be opening up the floor for questions, too, so I’ll analyze any chart I get asked about. If you would like to reserve your spot, you can click here to learn more about joining my NexGen investing services if you’re not already a member.

Taking Advantage

We’ve jumped on a few opportunities already this week, adding a couple of shorter-term trades and a longer-term holding. The sell-off in tech hit every company even remotely connected to the sector, which means it was overdone in a lot of those companies, and it gave us the buying signals we look for. For example, we just bought a software company and a leading gaming company, both of which benefit from the hot tech trend in e-gaming. You wouldn’t catch me sitting around watching other people play video games, but it’s really taking off, so we might as well make some money in it!

We’re not done yet, and whether the tech sell-off scared you a little bit or not, my message to you and to every other investor is the same: You need to be in this market. There is still a lot of money to be made, especially in stocks leading the way in NexGen mega-trends shaping our present and our future.

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