How Low Can This Stock Go?
If you’re like most investors, you’ve probably experienced the anxiety of buying a stock and holding on as it drops lower and lower.
“How low can it go?” is a question that every investor has asked himself at one point in time.
Today, I’ll tackle a reader question to show how you can determine where your prize investment might find a bottom…
This is not a penny stock, but if it keeps on going down, it may wind up there: Nabors Industries (NYSE: NBR).
Nabors is a mid-cap drilling contractor for the oil services industry. With oil prices getting slammed back below $100 in the last few months, it’s no shock that NBR is suffering from the fall. But the question is when investors might get a reprieve form the selling. This stock’s chart shows us some clues:
The first thing you should notice about this chart is the fact that NBR has been in a well-defined downtrend since the start of March. Despite an attempt to break outside of that trend channel back at the start of May, those parallel blue lines have done a good job of reigning in Nabors’ price action since the downtrend started. That’s not a very optimistic sign for investors right now.
Neither is RSI. RSI, which stands for Relative Strength Index, measures a stock’s momentum. The best way to think about momentum is that it’s how fast a stock’s price is increasing or decreasing — kind of like your acceleration when you’re driving your car. It’s measured by that upper line in the chart of Nabors above…
As you can see, momentum has been trending lower since the start of the downtrend in NBR — since momentum is a leading indicator of price, that’s a signal that the selloff isn’t set to stop anytime soon.
But while that chart may keep us from buying now, it still doesn’t answer the question of how low NBR can go. To figure that out, let’s zoom out to a bigger timeframe:
The chart above is a weekly chart of NBR — so where each candle represents a day in the first chart I showed you, each candle in this second chart represents a whole week of price action. The weekly chart gives us a good look at the bigger price action in shares of NBR, but it does so at the expense of some of the detail we can see in the first chart.
#-ad_banner-#Still, you can see where the two charts show the same timeframe — see that downtrending channel at the right of the second chart? That’s the same downtrending channel as the one I drew on the first one.
There are two significant things to take away from this weekly chart. The first is that we’ve got a major support level at $13, and the second is the large number of resistance levels overhead that would have to get taken out before NBR could stage a move higher.
Support at $12 got set back in October 2011, when this stock made a sharp low. That low point indicates that there’s demand for NBR at and below $12; after all, investors plowed into shares the last time they made it that low.
If you own NBR right now, it’s worth realizing that $12 is a place that shares could turn around — or at least stop freefalling.
But at the same time, we have all of those potential stumbling blocks (all of those thin blue lines) above NBR’s current price. Those thin lines are resistance levels, or places where sellers have historically been more eager to sell and take gains than buyers were to buy. So while I think that the selling is likely to cool down below $12, I wouldn’t recommend buying NBR right now.
The next time you’re stuck in a stock that’s dropping like a rock, zoom out and look for a key support level like that $12 price in NBR — it should give you an idea of whether it’s time to unload shares, or whether a bounce is imminent.