Ask Colin

How do you deal with the situation where a stock has broken below the trendline but resumes it's uptrend?

I do not use trend lines in my investment plan except for one situation. If a share's price is rising almost vertically and I want to sell part of my holding into the first sign of weakness, a short term trend line drawn through the lows of the bars may be useful. I would sell either on the day the first bar broke the trend line, if I saw it on the day, or on the next day. Remember that trend lines only seem to work well if the trend unfolds at a fairly even rate. When it doesn't., trend lines may not be very useful.

Other tools may be better. A short term reversal signal can be useful. The Parabolic indicator is also useful.

However, to answer your question for what I might do if trend lines were part of my investment plan. It would then depend on what the rules were for the plan. A trend line that is broken tells us that the rate of ascent of the trend has slowed down. This might be used in an investment plan as a signal to take some profits. It may then be that the plan calls for the sale to be reversed if the trend makes a new high.

Personally, I do not use trend lines at all. I trade the trend. So, if the trend is intact, even if it cuts a trend line, I would not take any action.

I would continue to hold my position. However, as I say, that is my investment plan. You may have another plan and it may call for you to take action on the trend line break and again on confirmation of the trend. It is up to you to test if that is workable and to build it into your decision rules. There are many different ways to write a plan. The key is that the plan suits your personality and risk tolerance.

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