Let's face it. There's nothing better than owning shares of growth stock leaders in the early stages of a powerful move — like the one by Applied Materials (AMAT) several years ago. Recognizing when a stock is forming a bullish chart pattern that could yield more upside is a great skill to have when scouring the market for buy candidates.
XBut it's not always chart patterns that yield ideal entry points in a stock. Downward-sloping trend lines, found by connecting a stock's recent highs, can also yield actionable buy points that are often earlier than buy points in a classic base.
When a stock breaks out over a trend line, in many cases, it's also breaking out of a downtrend.
In many cases, stocks breaking out of downtrends will still be far off highs, as opposed to stocks building bases, which tend to be closer to new-high ground.
Bullish Charts In Growth Stocks: When To Buy Early
In hindsight, Applied Materials' strong price performance in 2016 and 2017 anticipated improving fundamentals. The semiconductor industry bellwether certainly has delivered in recent quarters. Over a cycle of five quarters, year-over-year sales growth ranged from 20% to 45%; earnings jumped 41% to 158%.
That's impressive for a company that at its peak in March 2018 showed a market capitalization north of $60 billion. And it's organic growth, too, not fueled by recent acquisitions.
The accompanying chart shows how a trend line on a weekly chart can be used to identify a correct entry point.
In this example, just two highs were connected, but there will be weekly charts where connecting three or four recent highs is easy to do.
A Bullish Breakout Signal
Applied Materials broke out over the trend line in late February 2016, just ahead of a breakout from a standard buy point of 19.41 in the long base. It continued to show relative strength with two more breakouts.
In each case, the entry price was at least several points higher than with the trend line entry.
Trend lines can be drawn on daily or weekly charts. The best trend lines on a daily chart are found when at least a few highs can be connected over a time frame of at least several months. As Applied Materials showed, connecting just a couple of highs on a weekly chart can also result in a clean trend line.
A version of this story was originally published on Nov. 24, 2017 and has been updated. Follow Shreve at @IBD_KShreve for more on growth stocks and stock market analysis.
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