The Issue with Rallies in Downtrends

Bluebird Bio is a pretty good technical example of the trouble in playing stocks in downtrends. If you are buried long in the name from higher prices, say, above $60 or even $80, then of course all sizable rallies like the one we are seeing now will come as a relief. 

If you were pressing short "in the hole" at recent lows, then you needed to honor a sound and fairly tight cover-stop in order to mitigate risk, and acknowledge that we are in the midst of a counter-trend relief rally. 

And if you have been playing great defense on the way down, you may look at the daily chart, below, and see a stock breaking above well-defined near-term resistance, seemingly a bullish development. 

But BLUE remans in a strong overall downtrend, and the many V-shaped rallies from prior years of this bull market seem less likely to materialize again. Instead, we now have  stock which is overbought (price above its upper Bollinger Band) and up against a declining 50-day moving average.

The 200-day moving average is well above $100, which would mark a 100% move in the stock at the moment to even hit that reference point. But then there is the issue of the any trapped longs above, who erroneously declared a bottom in recent months. If, perchance, they are made whole with a rally above $60, they are much more likely to sell more than buy more or hold, likely causing overhead supply to kick in. P

Putting the emotions of the moment to one side, the same discipline which enables you to avoid getting trapped long on the way down often sees you missing out on the first leg of a new run higher, assuming BLUE has, in fact, bottomed. But if you can get over the idea of trying to catch every single move in the market, you should be a great spot to pounce once a major bottom becomes more pronounced, with much less risk. And if the bear resumes with a new leg down, you can look to the short side, all without having been trapped and allowed your ego compelling you to take unnecessary risks. 

Earnings are coming up next week on February 24th. So consider this for illustrative purposes of the complex issues in putting fresh money to work on the long side in downtrends for anything more than a scalp.