Canopy Growth Corp (NASDAQ: CGC), Walt Disney Co (NYSE: NYSE:DIS) and eBay Inc (NASDAQ: NASDAQ:EBAY) are all trading in confirmed downtrends.
A downtrend occurs when a stock consistently makes a series of lower lows and lower highs on the chart.
The lower lows indicate the bears are in control while the intermittent lower highs indicate consolidation periods.
Traders can use moving averages to help identify a downtrend with descending lower timeframe moving averages (such as the eight-day or 21-day exponential moving averages) indicating the stock is in a steep shorter-term downtrend.
Descending longer-term moving averages (such as the 200-day simple moving average) indicate a long-term downtrend.
A stock often signals when the lower low is in by printing a reversal candlestick such as a doji, bullish engulfing or hammer candlestick. Likewise, the lower high could be signaled when a doji, gravestone or dragonfly candlestick is printed. Moreover, the lower lows and lower highs often take place at resistance and support levels.
In a downtrend the "trend is your friend" until it’s not and there are ways for both bullish and bearish traders to participate in the stock:
- Bearish traders who are already holding a position in a stock can feel confident the downtrend will continue unless the stock makes a higher high. Traders looking to take a position in a stock trading in a downtrend can usually find the safest entry on the lower high.
- Bullish traders can enter the trade on the lower low and exit on the lower high. These traders can also enter when the downtrend breaks and the stock makes a higher high indicating a reversal into an uptrend may be in the cards.
The Canopy Growth Chart: Canopy Growth entered into its latest downtrend on June 28, with the most recent lower high printed on July 7 at $2.76 and the most recent lower low formed at the $2.13 level on Thursday. When Canopy Growth surged higher on Thursday the stock may have printed its next lower high within the pattern because the stock rejected the eight-day exponential moving average.
The Disney Chart: Disney has been trading in a fairly consistent downtrend since March 29, with the most recent lower high created at the $98.19 mark on July 6 and the most recent lower low printed at the $92.31 level the day prior. On Thursday, Disney was trading lower but Friday’s candlestick will need to print in order to determine whether or not the low-of-day will serve as the next lower low within the pattern.
The Ebay Chart: eBay is trading in a downtrend within a larger horizontal trading pattern. The stock has good support at the $41 level and has bounced up from the area on each of the last three times the eBay has tested it as support. A bounce to the upside to form another lower high may be on the horizon but if eBay loses the $41 level a larger downtrend is likely in the cards.
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