December 06, 2005 at 4:32 pm | | Comments 5

Downtrending Stocks – Don’t Buy!

Everyone wants a great deal. If you don’t think so, just consider the day-after-Thanksgiving sales with people lined up outside the stores at 5am to buy merchandise on sale. We want things now and we want them cheap! When it comes to stocks, however, I know better.

They say to buy low and sell high. It’s a good concept if you can get it to work, but it implies that buying low is the first thing to do. Novice stock traders look to buy “cheap” stocks, whether it’s just a low-priced stock or a stock well off its highs. Remember, cheap stocks tend to be cheap for a reason!

Low-dollar stocks often fall into one of two categories: the former high-fliers which have split so many times and come down so far that they are simply too liquid and “thick” to make much of a move (LU, NT, etc.), and stocks which are cheap because they fizzled out long ago and no buzz has been generated since. These kinds of stocks don’t move enough for an active trader, unless you are as interested in trading so many shares that your broker makes as much in commission as you do in profits.

A downtrending stock is making lower highs and lower lows. Money is coming out of it. People are walking away in search of finding something more attractive. When you buy a stock, you want it to go up, so look for stocks with some buzz, some positive activity, and some momentum.

An example of how disastrous it can be to buy a downtrending stock is MOVI. This stock began trending lower many months ago, and has shed most of its value.

Downtrending Stock MOVI continues to trend lower, and buying a “cheap” stock would have been costly!

Consider the novice traders who wanted to buy a stock off its highs. They may have moved in to pick up shares in late June near $27 or so, which was more than $7 off the recent high. Those buyers never saw their trade turn profitable. What if they “averaged down” in the $20 area, hoping to catch a quick bounce to let them out? All they did was compound their losses. What about now that the stock is trading near $5.00? Would you feel like getting up and running after falling off a 20-story building? This stock probably doesn’t either. It’s best to stay away from chart patterns like this until the buyers regain control and the stock begins to build some upside momentum.

Buying stocks in downtrends is a recipe for disaster. Save your bargain-hunting for the retail stores and holiday shopping, but prepare to pay up if you want to buy a stock and turn a profit!

Jeff White
President, The Stock Bandit, Inc.