Ford Motor Company (NYSE:F) was surging 8% on Friday, propelled by both a bullish day in the markets and an upgrade from Morgan Stanley., which bumped the stock to Equal-Weight and announced a $13 price target.
The news may help Ford eventually reverse course into an uptrend but for the time being, the stock remains trading in a downtrend, which has been the case since Jan. 13 when Ford topped out at a new 52-week high of 25.87.
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 Ford Chart: Ford’s most recent lower high in its downtrend was printed May 4 at $15 and the most recent lower low was printed at the $12.21 level on Thursday. If Ford is going to reverse course into an uptrend, the stock will need to print a higher low above Thursday’s low-of-day.
- Technical traders may have anticipated a bounce would come on Friday because on Thursday Ford’s relative strength index (RSI) fell to the 25% level. When a stock’s RSI falls below the 30% level it becomes oversold, which can be a buy signal for technical traders.
- If Ford closes the trading session near its high-of-day price, the stock will print a bullish kicker candlestick pattern, which could indicate higher prices will come again on Monday. If the stock falls down to close the trading session with a long upper wick, it could indicate the next lower high has printed and Ford will trade lower on Monday, possibly resuming its downtrend.
- Ford has a gap above between $18.59 and $19.87. Gaps on charts fill about 90% of the time, which makes it likely Ford will rise up to fill the empty trading range in the future.
- Conservative bullish traders will want to see Ford rise up above the eight-day and 21-day exponential moving averages (EMAs) before taking a possible position. This would eventually cause the eight-day EMA to cross above the 21-day, which would provide more confidence the stock’s bear cycle is over.
- Ford has resistance above at $14.34 and $15.51 and support below at $12.79 and $11.99.
