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Don't Buy A Stock That Lives Under Its Moving Average Line

Investor's Corner just completed a set of nine columns on chart patterns that help dedicated growth investors make money.

These key patterns range from the cup with handle to the rare high, tight flag Knowing how to exploit these patterns of investor behavior is empowering. But don't forget to tread cautiously.

Not every will work. A cup will fail if the market is in terrible shape. In other cases, the cup itself will have a flaw.

If you buy a new digital TV that has defects, no worries. Just take it back to the store or return it for a refund. The stock market does not have such a customer-friendly policy.

It pays to understand the major traits of a poor base structure. When you've identified one or two such shortcomings in a stock, don't buy it. Find better merchandise.

Let's say you are spying a stock that has gone on a long run and is trying to achieve one more hurrah. If a stock spends at least eight or nine weeks in a row beneath its 10-week moving average, it may lack the strength to build a sound base.

A stock that is "living" underneath the 10-week line is probably trading well below its 52-week or all-time highs. This implies that demand is slack.

In contrast, a great stock will spend a lot of time in the upper half of the base's price range. Healthy share demand allows it to trade at a high price. Before the breakout, it's usually trading above its 10-week line and finding support amid brief pullbacks.

Monsanto (MON) scored a marvelous bull run in the mid- to late 2000s. But after topping in June 2008, the stock slid downhill.

The seeds giant dropped 56% from a high of 145.80 to a low of 63.47 in November 2008. Then it began a long bottoming process. Problem was, it stayed near the bottom of its base for far too long.

Volume soared in the week ended Oct. 30, 2009, (1) as Monsanto finished an eighth straight week below the 10-week moving average.

Three weeks later, the stock reclaimed its 10-week line and built a downward-sloped . (2) dried up nicely. But Monsanto still lay 42% below its 145.80 peak.

The breakout lasted one week, and Monsanto sank. It dropped 48% below the 85.10 entry point in less than six months.