Hindsight is 20/20. While screening stocks each day, it's not uncommon for investors to bring one up and wistfully say, "It looks good today, but imagine if we got in back here!"
IBD's research shows that the optimal buy point is at new highs, not new lows. Since time traveling hasn't been made available to the public, these bottom-buying fantasies are just that: fantasies. But if you can't wait for the proper buy point or just want to squeeze a few more points out of your winners, try using a trendline.
Trendlines are used to identify price paths in stock charts, commonly over a series of highs or lows. Chart readers use them to identify changes in stock behavior. On an index, they can signal shifts in the overall market. Most importantly, they can present earlier entries when used with base patterns.
The Early Entry In Stock Charts
Trendline entries work best with stocks already forming proper bases. Normally, a stock's buy point is determined by a prior high in the base. But waiting for that entry can mean leaving behind a good part of a stock's advance.
Drawing a downward-sloping line across a stock's highs, see how many high points you can connect. (MarketSurge subscribers can draw trendlines on their charts by pressing the control key and simultaneously dragging their mouse.)
The more price highs that your trendline touches, the greater your chances of success. You will need a minimum of three points to connect your trendline. Often, the first is the base's left-side high. If the stock crosses above your trendline with volume, that is your new buy signal.
Taylor Morrison peaked at the end of 2021 with the rest of the market. This U.S. homebuilder pulled back in late December and spent 2022 building a deep cup base (1). TMHC found resistance at the 40-week moving average numerous times, spending more than half the 59-week base below it.
From the left-side high (2), across the highs in March (3) and in the August high (4) the stock met resistance. This made for a clear trendline.
In the week ended Oct. 28, the stock again found resistance. But two weeks later, Taylor Morrison crossed above the trendline (5). This move marked the trendline breakout, and a time to buy at around 27.
Had you waited until the end of the week for confirmation, an entry near 28.19 still gave you an additional 25% profit than if you waited 12 weeks for the traditional buy point at 35.51 (6).
By mid-June 2023, Taylor Morrison had climbed more than 30% from its buy point and up over 70% from the trendline entry.
This article was first published June 16, 2023, and has been updated.
