What is a good stock to buy?
"Buy low, sell high" It seems like a simple formula, but of course it is far from simple. Investors have different measures of value and these fluctuate with the whirlwind of information that blows through the market. What one investor thinks is a cheap stock, another doesn’t. When one investor thinks he’s buying low, another thinks she’s selling high. This is what makes the market so vital, so full of potential for profit…and loss. There are countless different ways to be a successful trader (or investor, if you prefer). The secret is to find a method that suits you. Every trader must find a “style” they are comfortable with – a system of selecting stocks based on their risk profile and the information they have.
The area graph above shows the relative aggregate levels of the NYSE Stock Trends indicators from Dec 2008 to Dec 2011. The percentage of stocks that are bullish or bearish fluctuate with the market, and this aggregate measure provides a good indication of market breadth and investor sentiment. Sometimes there is a divergence in the price level of the market benchmark (for the U.S. market the S&P 500 index) and the relative number of stocks that are bullish, something that reveals the quality or foundation of the market trend.
Stock Trends is just one approach. With luck, it will suit your “style”. It is designed to provide qualified leads. It also delivers a methodology based on trend principles. The focus is on stocks that are changing from a bearish trend. Stock Trends does not profess to “buy low”. Instead, think of the Stock Trends signals as “buying lower”. Invariably, there are lost profits found in the early stages of a breakout, but trend followers do not concern themselves with this. They focus on the probabilities that they can capture the remaining trend potential. “Buying lower” so we can “sell higher”. One cannot be greedy with this analysis – you must take what the market delivers.
If you want to succeed as a trader you are best to think long-term. Look for a system that delivers consistent – perhaps not spectacular – returns.
Why focus on weak-bearish () stocks?
The earliest indication of a possible change in trend - for a stock that has been moving up or down - is when a solid arrow turns to hollow ( or ). As soon as this happens, readers know the current price has penetrated the short-term trend line. Whether this translates into a bull run is a matter for more analysis. The stock may meet resistance and come tumbling down as quickly as it rose. Or if it has dropped off to Weak –Bullish , it might find support and climb back up.
The best buy opportunities are among the Weak Bearish stocks. These are issues that exhibit strong price movement after a period of falling prices. These are the stocks that may have bottomed out and are looking for better days again. Possibly, the smart money has already made its entry and, in the best situations, the stock is on the verge of becoming the flavour-of-the-month. Remember that there are three possible trends – rising, falling, and flat. This means that a stock that is changing from a bearish trend (as possibly indicated by the Weak Bearish indicator, and certainly the Bullish Crossover indicator) can subsequently turn to the dreaded flat trend, if not a bullish rising trend. The road to profitable trading of these indicators is navigated by an experienced eye for the factors that might lead to a rising trend, rather than an unsatisfying and frustrating trading range phase (a flat trend).
Investors should look for Weak Bearish stocks with growing volume that are consistently outperforming the market. The RSI should be increasing in recent weeks. Use the reports to find a list of stocks that all have the same indicators and similar trading patterns. Track their records over subsequent weeks. Do any patterns emerge?
If not, try other theories. Questions you might ask yourself: Should the RSI be high or low? Should the price be between $5 and $10? Should the volume be above 50,000 shares or 500,000? Be thorough and follow through with your analysis. Eventually, you will develop confidence in a pattern that reveals itself through your diligence. Only then is it time to trade solely on your technical indicator.
Technical analysis is a broad subject. An art disguised as science, technical analysis continues to be built by passionate practitioners who revel in creating and employing a variety of mathematical tools known as indicators. Unfortunately, many of these indicators are encumbered by esoteric, obtuse and complex formulations not clearly set in an understandable premise of market psychology. Fancy math - but what is it really telling us?
For most of us, the indicators are best employed if we understand the psychology behind the analysis. Perhaps this is why trend analysis, in particular, is so appealing: price trends are visually and intuitively convincing. Stock Trends incorporates both trend line and momentum analysis – our moving averages and Relative Strength Indicator – in a comprehensive and systematic manner on all stocks. However, the conditions or parameters of Stock Trends offer as much ambiguity as clarity in many cases. A stock that has a Bullish Crossover m one week (systematically qualified as a good sign) often defies expectation and becomes a chameleon stock of the retreating variety. If the trend line analysis says bullish, why does the stock lose ground? For the neophyte this contradiction is confusing. For the experienced it is the principal challenge – putting current price movement in a trend context. This is where our work begins every Thursday night when the Stock Trends analysis is produced.
Finding value in the Stock Trends reports requires some experience and a basic understanding of the indicators used. Because the conditions of each trend indicator are not inherently refined enough to give us a conclusive picture of a trend, it is imperative that we apply a critical eye to the signals. For instance, a stock that has turned to Weak Bearish and has a strong 13-week price performance (an RSI above 100) would be a good starting point as far as an early trend alert. The Stock Trends report “New Weakening Bearish/Bullish Stocks”, which is included each week with Stock Trends Weekly Reporter, lists all the stocks that have changed to a Weak Bearish symbol (i.e. the ST symbol is and the Minor trend counter is 1).
But this condition should lead us to a secondary method of evaluation. For most subscribers this will be an involved process that includes alternative sources of information. Some will have charting resources of their own – a most advisable situation – and determine the character of the signal by evaluating their own charts. In the weekly feature graph included with Stock Trends Weekly Reporter, I try to illustrate the workings of trend on one selected stock. Usually, the stocks that are chosen have been highlighted in a recent Stock Trends report. By applying some additional trend tools (like the Raff Regression Channel, the moving average convergence/divergence (MACD) indicator, or speed resistance lines) the graph puts the underlying trend in a visual context.
There are countless other indicators we could use, but for our purposes (and the keep it simple principle) the primary indicators employed are common trend graphical tools. They help us visualize the long-term trend and enable us to make better decisions about current price action. They also help us understand how to evaluate the Stock Trends indicators.
Stock Trends ‘Picks of the Week’ Filter
Apart from the stated commitment to making the most of the Stock Trends indicators within the context of each individual trader’s profile, followers of Stock Trends should benefit greatly from the stock selection filter employed in the Picks of the Week report included with Stock Trends Weekly Reporter. This weekly report - along with the Stock Trends Portfolio - provides the most value-added information in the weekly publication. The Picks of the Week report filters through the weekly trading on the TSX looking for both Weak Bearish and Bullish Crossover stocks with price momentum and strong volume. The parameters for inclusion in the Picks of the Week are broader than the Stock Trends Portfolio, so there are more stocks selected in this filter. The report is meant as a primary filter, one with which subscribers can make a further evaluation.