How And When To Buy Stocks- PART 2
When a stock falls recklessly, it is probably the onset of a bear market. Just because a stock is trading down 50 to 60% below its high, doesn't make it a good bargain. First, such a reduction could imply a serious fundamental problem that may not be evident in reported fundamentals. Second, even if there is no problem with fundamentals, a stock that undergoes a deep sell-off must assert with a large number of sellers. The more a stock drops, the more it is loaded by this overhang.
It is very easy to correlate the relative strength (RS) of companies in the market, with a simple ranking of 1 to 99 (99 being the strongest and 1 the weakest). The key is to use a mix of the RS ranking, the RS line (which compares stocks to the general market), and the technical action of the stock. These indicators will help in determining the best time to go long. If a person focuses on the ranking only, he could end up buying a stock that has moved up too much and is susceptible to a large correction.
The best stocks make their lows before the general market does. During a correction, the leaders deviate and make higher lows. The stocks that sustain the best and trade to new highs from the general market low during the first four to eight weeks of a new bull market are the true market leaders. These stocks are competent in making impressive profits.
While making buying decisions, one must always buy in order of strength. The best choices in the lineup will be the first to intensify ahead and rise from a decent buy point. The strongest ones are the best choices.
Commonly, the initial stage of a move off has the traits of a lockout rally. During this lockout interval, investors wait for an opportunity to enter the market on a retreat that never arrives. Rather, strong demand makes the market move higher steadily, dismissing overbought readings. As a result, investors are nearly locked out of the market.
The author talks about a continuation pattern known as the cup completion cheat or 3-C. It’s called a cheat because it was considered to be an entry earlier than the optimal buy point, which implies cheating.
It is the firstest point at which buying should be attempted for any stock. Some stocks form a low cheat while some form it near the middle of the cup or saucer that comes before it. The clue is to comprehend when the stock has bottomed and observe when the start of a new uptrend is underway, in sync with the primary Stage 2 uptrend. The cheat trade gives a pivot point to act upon to time the stock’s upturn while boosting the chance of success.
A logical cheat area should display a reduction in volume and tightness in price. This halt illustrates an opportunity to enter the trade at the earliest point, although not always with the whole position. Nevertheless, the average cost basis can be lowered by capitalizing on cheat areas to scale into trades. Once the stock trades above the high of the pause, it is believed to have made a turn. This suggests the stock has possibly made its low and will continue the longer-term Stage 2 primary trend.
The cheat structure is the same as the traditional cup with a handle because it is merely the cup portion being attained. When a handle forms, it usually arises in the upper third of the cup. If it forms in the middle third or below the halfway point, it may give more than one buy point.
There are the four steps to a stock appearing through the cheat area.
- Downtrend- The stock will encounter a midterm price correction that takes place within the framework of a longer-term Stage 2 uptrend. This can happen over numerous weeks or months. It is natural to experience large price spikes during the downtrend on increased volume.
- Uptrend- The price will break its downtrend and attempt to rally. However, it is too early to buy because the price and volume lack the essential confirmation that the stock has bottomed and entered a new uptrend.
- Pause- The stock will pause over several days or weeks and form a plateau area (the cheat), which should be contained within 5 to 10% from high point to low point. The best situation is to have the cheat drift down to the point where the price drops below a previous low. At this point, as the stock moves above the high of the pause, it is ready to be purchased.
- Breakout- As the stock rallies above the high of the plateau area, the buy order should be placed.
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The double bottom is a pattern that forms a “W” and cuts away, or in some cases tests, an earlier low within the base. Structures that run up straight from the lows without a cheat or handle are more susceptible to failure.
Power play, also known as the high tight flag, is one of the most important and profitable formats to learn. It is also one of the most misinterpreted technical patterns.
The following criteria must be met to qualify as a power play:
- A fierce price move with huge volume stimulates the stock price up 100% or more within eight weeks. Stocks that have already made an enormous increase coming off a late-stage base generally don’t qualify. The best power plays are stocks that were soft in Stage 1 and then unexpectedly explode.
- Following the volatile move, the stock price moves sideways in a fairly tight range, not rectifying more than 20% over three to six weeks (some can appear just after 10 or 12 days).
- From high to low, if the correction in the base does not exceed 10%, price tightening in the form of volatility contraction is not necessary because the price is already tight enough.
It takes time and discipline to understand how to recognize the best stocks and specify optimal buy points. Opportune purchases will put the trader on the road to super performance.