IBM is usually a pretty boring stock and I hardly ever pay attention to it. But it caught my eye today and I am looking at it as a potential buy. When I am looking for low risk trades I like to look at stocks that are making new long-term lows and are testing former levels of support. That's the case here.
As recent as February, IBM was trading around $180. Since then it has pretty much been in freefall and it is down about -20%. Now it is testing support around the $145 level. This is where it found a bottom last year from March through June. As always with a scenario like this, I wouldn't enter the trade until it breaks the downtrend line. Remember, there is nothing mysterious about trend lines. They are simply graphical representations of the forces of supply and demand. When something is in a downtrend it means that the forces of supply are in control of the market. When the trend line is broken, it means that the forces of demand have taken control, or at least have become equalized with the supply forces.
Many investors and traders try to catch the exact bottom because they feel that it proves they are smart. However, the Risk Reward ratio is much better if you enter the trade only after the downtrend line is broken. An important rule of successful trading is "don't worry about being right. Worry about making money". I know it sounds trite, but if you really think about it...it's a pretty profound psychological dynamic.
To sum it up...
- IBM may be a potential buy because it is trading at levels that were support last year.
- It is down -20% since March.
- Don't enter the long trade until the downtrend line is broken. This can prevent you from getting run over.
- Worry about making money. Forget about being right.