Most Perfect Downtrend Example

Dec 3, 2007: 10:17 PM CST

What would be the ideal picture of a technical downtrend? A few names come to mind but let’s examine Pulte Homes (PHM):

I have annotated the Daily Chart of Pulte Homes (PHM). Let’s define a downtrend using the simplest two definitions possible:

  • A series of lower lows and lower highs
  • The 20 period moving average being beneath the 50 period moving average which itself is beneath the 200 period moving average

We see these two events occurring on the chart. Notice the orientation of the three key moving averages (20, 50, and 200).

Notice how ‘sloped’ the 200 period MA appears and how steady the space remains between the declining 50 period and the 20 period MAs.

This would be the epitome of a classic downtrend – one need look no further for a ‘picture perfect’ example.

Notice the “Short Squeeze” which occurred around August 2007. Rapid (and violent) up-thrusts in price also characterize a downtrend because even the slightest bit of good news will cause shorts to cover quickly and ‘bottom fishers’ to buy up shares. Unfortunately, such quick ‘squeezes’ in price often fade just as rapidly as they occur.

What we see at the end of the chart is a potential “capitulation bottom” where volume has skyrocketed as price has made a large volatility move to the downside. While “volume confirms price” or “volume precedes price,” there are instances where everyone who wants to sell (and is still holding shares) HAS sold and there’s no one left to sell. Unfortunately for most, these instances occur when all news both from a fundamental and technical standpoint is at its worse (else, why would people sell en masse?).

Let’s take a quick look at the weekly chart:

I have highlighted the recent sustained increase in volume to the downside.

The orientation of the moving averages is in the most bearish position possible yet again.

Nevertheless, if you wanted to observe a ‘picture perfect downtrend’ in the simplest terms, view Pulte Homes or almost any other homebuilder stock in the current environment.

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