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Think and Trade Like a Champion

How And When To Buy Stocks- PART 1

The author’s approach is to trade with the trend.

  • He only buys stocks that are in long-term uptrends.
  • A stock that moves sideways in a strong uptrend could be good for buying.
  • Contrarily, a stock that consolidates but is in a strong downtrend could be good for short. It’s all a matter of perspective. 

Charts provide important indications. Price and volume inspections can help in determining whether a stock is under accumulation or distribution. It alerts of extreme danger and indicates when the chances of profits are fairly high.

 

One must be sure about what a stock should do instead of knowing what it is going to do. This is important because when the stock doesn't perform how it is supposed to, the decision to exit becomes easy and clear. 

 

Like all other stocks, super performance stocks also go through four distinct stages. This cycle can take several years or even decades. One should focus on Stage 2. Mark avoids going long in any stage except Stage 2. The other three stages either result in losing time or losing money. The four stages are based on the stock’s price action.

 

  • Stage 1: Neglect phase: consolidation 
  • Stage 2: Advancing phase: accumulation
  • Stage 3: Topping phase: distribution
  • Stage 4: Declining phase: capitulation

 

 

A stock must confirm all the eight criteria to confirm that it is in a stage 2 uptrend. 

 

  • The stock price is above both the 150-day and the 200-day moving average.
  • The 150-day moving average should be above the 200-day moving average.
  • The 200-day moving average line is on an uptrend for at least 1-month. Better if it is for 4 to 5 months.
  • The 50-day moving average should be above both the 150 and the 200-day moving averages.
  • The existing stock price is at least 25% above its 52-week low. 
  • The current stock price is within at least 25% of its 52-week high (the closer to a new high the better).
  • The relative strength ranking is not less than 70, but preferably in the 90s. The RS Line should also be in an uptrend for at least 6 weeks, preferably 13 weeks.
  • The current price is trading above the 50-day moving average as the stock is coming out of a base. 

As the stock shifts from Stage 1 to Stage 2, a meaningful pickup in volume can be seen as a sign of institutional support. Then the chart patterns should be evaluated. Here, the author looks for a volatility contraction pattern (VCP) to develop, which is the key to establish the exact entry point. VCP is the digestion period or the consolidation of previous gains made during the uptrend. In almost all the chart patterns, Mark looks for stocks that move from greater volatility on the left side of the price base to lesser volatility on the right side. 

 

With every constriction in a VCP, the price of the stock becomes lighter and can move in one direction much more easily than when it was loaded with lots of supply.

 

A price consolidation illustrates a period of balance. As it goes through a consolidation period, each stock makes its unique mark. As a stock corrects and moves lower, certainly some buyers are trapped who bought higher and hope for a rally to sell. They hope to break even which results in an oversupply.

 

During the volatility contraction, increasingly less supply comes to the market because long-term buyers meet short-term sellers. This is the overhead supply that has been holding the stock back. It’s important to keep in mind that the VCP happens at higher levels after the stock has already moved up 30, 40, 50% or more. 

 

A stock under accumulation will always exhibit VCP elements. This is exactly what is required to initiate a purchase on the right side of the base, which forms the pivot buy point.

 

A pivot point is the optimal buy point or the price level where it calls for action. A proper pivot point represents the fulfillment of a stock’s consolidation and the verge of its next advance.

 

When a stock’s pivot aligns with the line of slight resistance, it crosses the limit very rapidly and moves higher in a short time. With volume contraction, every correct pivot point evolves at a level below average. 

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