This is the third in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)
With this third post, we will continue further along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. This post will focus on using lists of new highs or new lows to find investing ideas.
Key #3: New highs and new lows can point to stocks with momentum or stocks ready for reversals.
Looking to ride an existing trend? Know a good stock that is being unfairly punished?
New highs lists can identify stocks in a strong uptrend. If you believe in momentum, the ability of a stock to continue to move in the same direction until some event causes it to reverse, then lists of new highs can identify stocks with further upside.
New lows can help you identify stocks to watch and wait for until they begin to turn around. The patient investor can keep an eye on the list of new lows and identify good companies with the potential to pull out of a nosedive.
Looking at the list of yearly highs, we find a company well know in my home state of New York, Paychex (PAYX), whose founder has run for governor. Here is a stock that hit a high around $42 in February, fell back into the mid $30's in April and started an uptrend in April. PAYX has added over 21% since that April low and is now over $44. Looking at a long-term 5-year chart of PAYX, you will see that it has essentially been slowly trending up the entire time with a series of higher highs and higher lows. Perhaps the strategy would be to buy on a pull-back and then ride that long-term trend upward.
For these kinds of stocks, there are two strategies: (1) look for stocks getting to the end of their decline or (2) look for stocks just getting started on their decline.
(1) Sifting through beaten down stocks to find the ones that have the potential to rise again can be a profitable enterprise. Indeed, watching stocks making new lows will eventually give you the first glimpse of when they are finally engaging in a reversal and turning up again. Putting these stocks on your watch list when they are making lows ensures you will not be chasing high flyers. Buying after a serious decline will hopefully reduce risk.
(2) You can also find stocks that have further expected downside and, using various options strategies, (buying puts, for example) , you can find ways to profit as these stocks continue their descent. If you are interested in this approach, the lists of stocks falling below their 50 and 200-day moving averages would be the best places to look as this would indicate the decline is just getting going and there is further room to fall.
Currently, all these new low lists are dominated by stocks involved in real estate, either builders, lenders or mortgage insurers. Doing some due diligence on the strength of these companies and their ability to weather the storm in real estate could give you a good idea of who will survive the downturn. For example, Hovnanian Enterprises (HOV) is a large, well-known home builder currently hitting lows and showing up on all these lists. Yet it is rumored that Warren Buffet is looking into buying a piece of the company. Buffet knows value when he sees it. Maybe he watches these lists, too.
Quote.com - This is a good place to find ideas among stocks that are showing unusual activity: gainers and losers, unusual volume, yearly highs or lows, stocks with unfilled gaps, most volatile, etc.
Shaeffer's Stock Screen Center - Lots of pre-built screens based on Bernie's Put/Call Open Interest Ratio analysis techniques. Options are a focus on this site, often to use as a guide for analyzing stock performance. Sometimes, a contrarian point of view is expressed and that is useful as a counterbalance to the accepted market wisdom of the day.
StockCharts.com Predefined Scans - Screens based on technical indicators, candlestick patterns and point and figure patterns. Includes stocks on major indexes (including Canadian) and mutual funds.
With this third post, we will continue further along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. This post will focus on using lists of new highs or new lows to find investing ideas.
Key #3: New highs and new lows can point to stocks with momentum or stocks ready for reversals.
Looking to ride an existing trend? Know a good stock that is being unfairly punished?
New highs lists can identify stocks in a strong uptrend. If you believe in momentum, the ability of a stock to continue to move in the same direction until some event causes it to reverse, then lists of new highs can identify stocks with further upside.
New lows can help you identify stocks to watch and wait for until they begin to turn around. The patient investor can keep an eye on the list of new lows and identify good companies with the potential to pull out of a nosedive.
Looking at New Highs
At Quote.com, they provide lists of yearly highs and lows and, of benefit mostly to day traders, very short term highs and lows (within the most recent 15 minutes during the trading day).Looking at the list of yearly highs, we find a company well know in my home state of New York, Paychex (PAYX), whose founder has run for governor. Here is a stock that hit a high around $42 in February, fell back into the mid $30's in April and started an uptrend in April. PAYX has added over 21% since that April low and is now over $44. Looking at a long-term 5-year chart of PAYX, you will see that it has essentially been slowly trending up the entire time with a series of higher highs and higher lows. Perhaps the strategy would be to buy on a pull-back and then ride that long-term trend upward.
Looking at New Lows
Checking the list of yearly lows isn't as much fun but for a really good selection of screens for stocks that are in the doldrums (as well as stocks that are on the upswing), we will use Shaeffer's Stock Screen Center. Here we not only have stocks that have hit 52-week lows but also stocks that are high-volume losers and stocks that have fallen below 50 and 200-day moving averages. In other words, there is a wealth of depressing stock news.For these kinds of stocks, there are two strategies: (1) look for stocks getting to the end of their decline or (2) look for stocks just getting started on their decline.
(1) Sifting through beaten down stocks to find the ones that have the potential to rise again can be a profitable enterprise. Indeed, watching stocks making new lows will eventually give you the first glimpse of when they are finally engaging in a reversal and turning up again. Putting these stocks on your watch list when they are making lows ensures you will not be chasing high flyers. Buying after a serious decline will hopefully reduce risk.
(2) You can also find stocks that have further expected downside and, using various options strategies, (buying puts, for example) , you can find ways to profit as these stocks continue their descent. If you are interested in this approach, the lists of stocks falling below their 50 and 200-day moving averages would be the best places to look as this would indicate the decline is just getting going and there is further room to fall.
Currently, all these new low lists are dominated by stocks involved in real estate, either builders, lenders or mortgage insurers. Doing some due diligence on the strength of these companies and their ability to weather the storm in real estate could give you a good idea of who will survive the downturn. For example, Hovnanian Enterprises (HOV) is a large, well-known home builder currently hitting lows and showing up on all these lists. Yet it is rumored that Warren Buffet is looking into buying a piece of the company. Buffet knows value when he sees it. Maybe he watches these lists, too.
The TradeRadar list of sites featuring new highs and lows:
Many of the same sites that provide unusual activity or stock screeners also list stocks making new highs and lows. Here's our list:Quote.com - This is a good place to find ideas among stocks that are showing unusual activity: gainers and losers, unusual volume, yearly highs or lows, stocks with unfilled gaps, most volatile, etc.
Shaeffer's Stock Screen Center - Lots of pre-built screens based on Bernie's Put/Call Open Interest Ratio analysis techniques. Options are a focus on this site, often to use as a guide for analyzing stock performance. Sometimes, a contrarian point of view is expressed and that is useful as a counterbalance to the accepted market wisdom of the day.
StockCharts.com Predefined Scans - Screens based on technical indicators, candlestick patterns and point and figure patterns. Includes stocks on major indexes (including Canadian) and mutual funds.
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