Amazon.com, Inc (NASDAQ:AMZN), Moderna, Inc (NASDAQ:MRNA) and Nike, Inc (NYSE:NKE) are all trading higher in strong 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 an uptrend 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 and descending longer-term moving averages (such as the 200-day simple moving average) indicating 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 in a downtrend, 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.
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The Amazon Chart: Amazon has been trading in a downtrend since printing a double top pattern near the July 13 all-time high of $3,773.08 on Nov. 19. Amazon’s most recent lower high was printed on Jan. 4 at $3,428 and the most recent lower low was created at $3,238.74 on Thursday.
On Friday, Amazon was looking to print a bullish double bottom pattern at the lower low and if the pattern is recognized the stock may pop up next week to print its next consecutive lower high.
The Moderna Chart: Moderna has been trading in a fairly consistent downtrend since Aug. 10 when the stock reached an all-time high of $497.49. The stock’s most recent lower high is at $259.20, which was created on Dec. 31 and the most recent lower low was printed on Thursday at the $25.23 mark.
Thursday’s daily candle was a doji, which indicated the stock may trade up higher over the days that followed in order to print the next lower high.
The Nike Chart: Nike has been trading in a downtrend since Nov. 5, when the stock printed an all-time high of $179.10. Nike’s most recent lower high was printed on Dec. 30 at the $170.12 level and on Friday, Nike was dropping lower while forming a bearish Marubozu candlestick. This indicates the lower low is likely not in and the stock may fall further on Monday.
Traders can watch for the stock to eventually print a reversal candlestick before taking a short-term bullish position in order to catch a bounce.