You have a great stock you want to buy but it is in a sharp uptrend. It has already formed a price base and broke out and has been in a continuous uptrend making higher highs and lower lows.
Where do you get on board? What is your second chance entry? Well you can wait for a new base to form and a 2nd breakout or you can jump on the stock when it has a pullback to the 50 day simple moving average.
No stock goes to the moon. It is eventually pulled back like gravity to earth and its key moving averages. This is the 2nd chance for a trader to strike that has messed the base and break out.
A big key to supply and demand is the much watched 50 day moving average. If a stock is in an uptrend and gets close to the 50 day moving average but then reverses and resumes its uptrend it has support at the 50 day. If it loses the 50 day but retakes it and closes above it, that is a good sign that it has found support and the uptrend will continue. Their are many eyes on the charts looking for second chances to get into their favorite stocks, the first and best chance is a pull back to that 50 day where the price bounces off and reverses trend our recovers with authority with a large break back above it or recovers with above average volume and closes at the high of the day.
Be aware though that the 50-day moving average lines can also tell you when a stock is breaking down in price strength and has gone from being acquired by major institutions to being distributed. If you see a stock fall below its 50-day moving average line on its heaviest volume in months, and it does not rally back above before the close of the day that it is lost, then it’s a sign big investors are selling, rather than buying.
Stocks that suffer drops below their moving average lines may go on to form a base and eventually recover, and even take out all time highs if they are with in striking distance of those previous high prices. Or they may continue to slide down to the 200 day simple moving average in a bearish down trending market. They key is you want to only be long if it closes above the 50 day and you want a stop set to get you out if it is lost again and not recovered the following day. It can be your entry point and line in the sand on whether the stock crumbles and falls of is just taking a breather before its next run into earnings expectations. The 50 day can be your second break out entry point in the best stocks.
It’s much more emotionally comfortable to be in cash as a stock becomes volatile and swings wildly through key moving averages than it is to be hanging on during a wild ride. You want a stock that is steady as she goes that respects its key moving averages. You want the chart over the past year to make sense with key support levels that you can see multiple bounces off of: The 50 and 200 day moving averages.