How to Trade This Auto Stock

 

Buying stocks is easy. You hear about a new product, or you find an amazing value play, and you hit the “buy” button.

It’s the part that comes after that’s hard. When things go your way, when should you sell? And when they don’t — what do you do then?

You’re in luck. Today, I’m going to share with you some simple trading tools that will answer all of these questions.

To get things started, let’s tackle some reader mail to see what’s going on with an American auto giant:

I own shares of Ford (NYSE: F). Do I hold or sell this stock? What do you say?

— H.C.

The past quarter hasn’t been a good time to be a Ford shareholder. Shares are down more than 17% in the past three months, a time when the broad market is down only 4% and change. That’s some painful performance…

There are about a million reasons why someone may have bought shares of Ford. Heck, I even agree with a lot of them. I mean, this company has managed an impressive turnaround, skirting bankruptcy in 2008 to build some of the highest quality (and best looking) cars in company history. And the stock is cheap. Right now, Ford sells for just two-times earnings, a bargain for a company that’s posting new record profits.

But the technicals have painted a less attractive picture of Ford in 2012. Take a look at this chart:

The downtrend in Ford was brutal for the past few months. But it’s been consolidating sideways more recently. So, is this a buying opportunity, or just a little pause before this stock gets shoved off a cliff again?

Two technical cues hint at the answer…

For starters, we’re seeing an ascending triangle pattern taking shape in Ford right now. The ascending triangle is a pattern that’s marked by horizontal resistance (at $10.75 for Ford) and uptrending support. As shares bounce in between those two technical levels, Ford is getting squeezed closer and closer to a breakout above $10.75. When that happens, we know that all of the selling pressure above that price has been absorbed, and it makes sense to be a buyer.

Another important indicator to watch is momentum. Momentum measures how fast price action is changing for Ford. You can see one measure of momentum, RSI, on the top of the price chart for Ford. While it had been in a downtrend leading up to the dropoff in Ford’s share price, that downtrend broke in late May. Since momentum is a leading indicator of price, the higher highs RSI bodes well for Ford shareholders.

A quick technical look at what’s going on in Ford tells us a lot about this stock. First of all, if you’re looking to be a buyer, it makes sense to buy if Ford cracks above that $10.75 resistance level — that’s where we know buyers are overwhelming sellers. If you already own shares, it makes sense to hold for now. I’d only sell Ford if it broke $10 support.