How can you tell if a stock has hit bottom? If you don’t know, you won’t make money in the stock market easily. Here’s one fairly solid indicator.
What you see below is something called an ascending triangle.
An ascending triangle is made up of a resistance line (top of the triangle) and then an upwardly sloped trend line (bottom of the triangle) that meets the resistance.
When you see this pattern, you’ll notice that the stock will bounce off of its trend line and hit resistance. Then it will fall at the resistance line and again find support at the trend line.
Eventually, the moves get smaller and smaller as the support and resistance lines meet.
Sooner or later, the stock will break out one way or the other. If it breaks above the resistance, then the bull run is confirmed. If it breaks under support, it usually means the bull run just fizzled out.
Most traders will look at the above setup and trade it like this. They place a buy order for Yahoo, Inc. (NASDAQ:YHOO) about 2-3% above the resistance line.
That way if the YHOO breaks through resistance, shares are automatically bought.
A good trader may also place a short-sell order 2–3% below the YHOO’s support line. If the stock breaks under support, it should move down further.
Why 2-3% away from those resistance lines?
Because it allows for some fluctuation. Technical analysis isn’t an exact science. So you always should allow for a buffer when trading based off of it.
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