Ford Motor Co. (NYSE:F) broke up from a bull flag pattern on Aug. 11, which Benzinga indicated prior. Over the following days, the stock tested the 200-day simple moving average (SMA) as resistance before beginning to consolidate under the level.
The 200-day SMA is a bellwether that indicates whether a stock is trading in a bull cycle or a bear cycle. Ford, like many other big-cap stocks, has recently been trading near to the 200-day SMA, which may suggest the market as a whole is trying to figure out whether the bear cycle is over or whether the most recent rebound has been a bull run within a larger bear market.
Ford’s rejected of the 200-day SMA on Tuesday caused the stock to retrace to the downside and possible print a higher low within the uptrend pattern.
An uptrend occurs when a stock consistently makes a series of higher highs and higher lows on the chart.
The higher highs indicate the bulls are in control while the intermittent higher lows indicate consolidation periods.
Traders can use moving averages to help identify an uptrend, with rising lower time frame moving averages (such as the eight-day or 21-day exponential moving averages) indicating the stock is in a steep shorter-term uptrend.
Rising longer-term moving averages (such as the 200-day simple moving average) indicate a long-term uptrend.
A stock often signals when the higher high is in by printing a reversal candlestick such as a doji, bearish engulfing or hanging man candlestick. Likewise, the higher low could be signaled when a doji, morning star or hammer candlestick is printed. Moreover, the higher highs and higher lows often take place at resistance and support levels.
In an uptrend the "trend is your friend" until it’s not and in an uptrend there are ways for both bullish and bearish traders to participate in the stock:
- Bullish traders who are already holding a position in a stock can feel confident the uptrend will continue unless the stock makes a lower low. Traders looking to take a position in a stock trading in an uptrend can usually find the safest entry on the higher low.
- Bearish traders can enter the trade on the higher high and exit on the pullback. These traders can also enter when the uptrend breaks and the stock makes a lower low indicating a reversal into a downtrend may be in the cards.
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The Ford Chart: Ford began trading in an uptrend on July 14 and has since made a consistent series of higher highs and higher lows. Ford’s most recent confirmed higher low was formed on Aug. 9 at $15.15 and the most recent higher high was formed at the $16.68 level on Wednesday. The latter level aligns perfectly with the 200-day EMA.
- It’s unlikely a stock or major market ETF will regain the 200-day SMA or lose the level as support on the first time. When a stock approaches the 200-day SMA from below, it often takes several attempts before the bulls will have enough power to drive the stock up above the level.
- Bullish traders will want to see Ford consolidate under the 200-day on lower-than-average volume, perhaps to form a bull flag pattern, and then for big bullish volume to come in and break the stock above the bellwether.
- Bearish traders want to see Ford continue to reject the 200-day SMA and then for big bearish volume to come in and drop the stock below the eight-day exponential moving average, which would be bearish at least for the short-term.
- Ford has resistance above at $16.45 and $17.02 and support below at $15.51 and $14.34.
Image: Ford Focus Electric at an LA Auto Show, Wikimedia
