The 200-Day Line Can Serve As The Last Line Of Defense

CAN SLIM investors pay attention to the 50-day moving average line.

They ask: Is the stock finding support at this closely watched level? Or is it starting to live below the line, mired in a correction

Sometimes it's also a good idea to watch the 200-day moving average. On a weekly chart, it's equivalent to the 40-week moving average.

With a growth stock during a bull market, the 200-day line will typically be well below the 50-day line. It seems irrelevant. And if your stock is falling into a deep correction, you'll likely be out long before your stock reaches the 200-day line.

But if your stock's rally gets so hot that the stock price rises 70% to 100% above the 200-day line, it might be time to lock in profits. Stay alert for other sell signals.

The 200-day line can serve as a long-term support line in some cases. Suppose you've held a stock for more than a year, patiently suffering through corrections while nursing a large profit. In some cases, a stock will test support at the 200-day line, then wrap up a new base before breaking out again.

But when a stock breaks sharply below the 200-day line in huge volume, it's time to sell. If you don't sell there, sell if your stock is living below the line for many weeks and if the 200-day acts as a resistance line, blocking a further advance. Also, if the 200-day line turns down, it's time to sell.

Home Depot (HD), a big winner in the 1990s, rode a home-remodeling and do-it-yourself construction boom. You might have bought it coming out of a base in May 1997. By April 1999, you had a profit of 247%.

The stock got support at its 40-week line (see the weekly chart) in June and August 1999 1 and again in March 2000 2 . Then Home Depot fell below the line in May 3 and stayed there for nine weeks.

Home Depot tried to rally above the line, but fell back amid a deep bear decline that coincided with the dot-com bust. Support had now become resistance.

This is where the long-term holder needs to sell. It's hard to sell a stock that's been so good to you for years.

But you make money in the market only by selling right.

Oct. 12, 2000, was a bad day for the market as it reacted to a terrorist attack against the U.S. destroyer Cole, docked in Yemen. Home Depot warned that it would miss earnings estimates that same day, sending the stock down 29% 4.