When trading high-performing equities like Robinhood stock, it helps to choose the right trendlines for the job.
Robinhood stock has consistently secured a spot in IBD's Leaderboard as part of the Leaders Watchlist. The stock has been the best-performing name in the S&P 500 for the year, with a near-300% gain. The stock has been running higher since April, briefly testing key resistance levels in August and September.
But for investors eager for returns, it helps to know whether the rally still has room to run or if it's running out of steam.
Regression channel lines can give traders insight into established price trends, and when a stock moves outside the lines, it can signal a change in character for the stock.
Regression channels can also highlight potential entry points, a useful feature for stocks where entry points are not often easy to spot.
Using the channels can give traders an expectation of where the stock should be trading as it moves higher, Chris Gessel, chief content officer at Investor's Business Daily, tells the "Investing with IBD" podcast. This can help indicate the expected behavior and momentum of a stock. A regression trendline uses a line of best fit across a set of data points, like a stock's prices.
Here are three takeaways from trading Robinhood stock using trendlines.
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Why Robinhood Stock Shows Not All Trendlines Are The Same
Trendlines can help act as guardrails for investors looking for a stock's recent behavior and trends, in particular highlighting changes in a stock's support.
On the surface, they can appear similar to other technical analysis methods like Bollinger bands. Bollinger bands, however, track a stock's volatility to identify potential turning points in price action. Regression channels, on the other hand, help gauge a stock's momentum.
Regression channels use the method of least squares to draw the best-fit line at its core. In addition to a price trendline, regression channels have two parallel lines above and below that are typically set at one standard deviation. Regression channels also include time limits on data points so the trend line does not keep updating.
When a stock's action takes it closer to the upper line, that signals an overheated stock, while a move to the lower line is where a stock expects support. A steep channel overall can also indicate if a rally is sustainable or if a stock is set to skyrocket.
Trendlines Can Help Formulate An Investing Plan For Robinhood Stock
When used as part of a trading strategy alongside other methods like moving averages, trendlines can illuminate a stock's next move, telling investors if it's proceeding in a normal fashion. More importantly, when a stock gets further from its average (the regression line), it builds in an expectation of movement back to the line.
Gessel entered into Robinhood stock on May 8 after a confirmed uptrend following the April 7 bottom. Shares gapped up more than 8% that day, breaking a downward sloping trendline and moving into an uptrend. Since that May 8 entry, the stock continued to follow the regression channels until it showed signs of becoming extended.
Regression lines can also echo stock movements visible through other tools and analysis methods. Gessel said regression channels have helped him manage his position in Robinhood stock, even as the stock tested key moving averages in August and September.
Trendlines Can Warn Of Danger
Regression channel lines placed around Robinhood stock can help traders gauge expectations of where the stock might be heading next. Stocks that break above regression channels can indicate stocks that are overextended, while stocks that fall below the trendlines can provide an early warning to investors.
For Robinhood stock, Gessel said that rather than adjust his position, he continued to keep his stake. "Because I had such a good profit, I just let it go. I didn't do anything and it wasn't that big of a position," Gessel said.
Tap here to watch the full podcast featuring IBD's Chris Gessel.
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