Don't Ignore This Chart!

Here's What A Warning Sign Looks Like

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From a short- to intermediate-term trading perspective, slowing momentum to the upside is a warning sign if you're long.  Slowing momentum can come in different forms, but I consider negative divergences on the MACD and weak volume on price breakouts to be two solid examples.  Based on these two criteria, Black Hills Corp (BKH) is a stock to be concerned about if you own it.  To illustrate, here's the chart:


The higher price with the lower MACD reading is a negative divergence and an indication of slowing momentum.  Note also that I've marked the lighter volume on the most recent price breakouts, another warning sign.  Finally, at the bottom of the chart, I've shown that the slope has moved lower (red arrow) despite further upside price action.  The slope is still positive, but the recent decline is a sign of trend deterioration and that, combined with the other two warning signs, tells me to sell the stock.  These signals don't guarantee a decline, they just suggest that further reward doesn't justify the increasing risk.

Happy trading!

Tom

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Tom Bowley
About the author: co-founded Invested Central in 2004 and served as the site's Chief Market Strategist for more than 10 years. Invested Central provides stock market education and guidance for those interested in making their own financial decisions. During his tenure at Invested Central, Tom co-hosted Market Open LIVE, a national radio broadcast that covered many of the largest markets across the U.S. In addition, he has spoken at various conferences throughout the United States and Canada and has taught thousands of traders across the globe how to trade equities more wisely with an emphasis on managing risk and intermarket relationships. Learn More
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