SEVEN SIGNALS OF A RISING STOCK PRICE

Spotting a trend at the nascent or incipient stage is the dream all of us chase as investors. Yet, the reality is that only a select few get it right at the right time. Most of us are guilty of bad timing when it comes to predicting the peaks and the troughs.

It is also true that within a trend - bullish or otherwise - there are exceptions, pitfalls or deviations which tend to mislead you. In the shorter term, there could be divergences from the primary trend. An understanding of trends and trendlines gives you the confidence to stick to your convictions and discover price patterns which herald an emerging trend or a trend reversal.

The focus of this article is on a rising stock price and how to determine whether it is sustainable over a reasonable period of time. Armed with this knowledge of trends, it becomes easier to decipher price patterns in a stock's chart.

ASCENDING TOPS- This is a very bullish indicator and refers to successive peaks in a stock's price chart with each peak higher than the preceding one.

VOLUME RATE OF CHANGE and PRICE RATE OF CHANGE- This is one of the most fundamental and time-tested patterns which signifies that a stock is bullish. If the rate of change is positive it means that volumes have grown over a given number of days. Ideally, the period chosen should be about a month so that the change is well-defined on the charts. Similarly, the rate of change in prices can be plotted to see if there is a positive change over a given number of days. Used in conjunction, the price and volume chart of a bullish stock would show a rising price line with a steady rise in volumes.

ACCUMULATION AND DISTRIBUTION LINE (A/D)- It is an important tool to pick a trend reversal. If the price of a security is moving downward but the A/D line is moving upward it indicates increased buying pressure and weakening seller strength. It is a momentum indicator that determines money flow. According to Marc Chaikin who created this tool, if a stock closes above its midpoint in a session it is a sign of accumulation. Alternatively if it closes below its midpoint, it signals distribution.

MONEY FLOW INDEX (MFI)- Another popular indicator developed by Marc Chaikin, it is based on the accumulation-distribution line and provides a useful trend confirmation. Its logic is simply that a rising stock price is accompanied by higher volumes and the closing price of the stock remaining in the upper half of its daily price range. A positive money flow (based on the Chaikin formula) signals accumulation and a higher reading above zero is regarded as a strong buy signal.

MOVING AVERAGES- It is a momentum indicator which defines a stock's resistance and support levels. It denotes a stock's average value over a defined period. It is a reliable trend indicator because it irons out short term price volatility and gives a signal of an upward momentum when a shorter term MA (15-day) crosses a longer MA (50-day).

BULLISH RECTANGLES- Another reliable indicator when they appear close to a stock's resistance or support levels. They signal accumulation when they occur in an uptrend.

FLAGS OR PENNANTS- These are short term patterns (usually one to five weeks) which result in a short consolidation phase in a stock's up move before a strong upward trend gains momentum. A flag is said to be formed when lines connecting the peaks and the troughs in a downward trend are parallel to each other. In an upward trend in a stock's price, the lines would run counter to the trend that is downward.

Spotting a trend successfully can be a great motivator. The truth, however, is that all these signals are meant to hone your investment skills but no guarantee of success because stock markets often behave irrationally. With a little patience, discipline and a well-defined strategy you can take care of short term price volatility to gain in the longer term if you have identified the primary trend correctly.

References- http://www.investopedia.com

http://www.incrediblecharts.co m

Learn more about this author, Dheer Kothari.
Click here to send this author comments or questions.

---

Add your voice

Know something about Seven signals of a rising stock price?
We want to hear your view. Write now!