February 2nd, 2011
I don’t know how many of you usually accumulate lists of stocks from which you select the ones you intend to buy. As we started this year, I assembled a list of over 250 stocks and forwarded it to subscribers of Instant Alerts. You’re probably saying to yourself, “So many stocks! There are just too many on the list and I can’t possibly buy them all. How am I supposed to wade through that many symbols to make a selection?”
Over the next several posts, I’ll explain what I think Watchlists are and how I use them.
Assembling a Watchlist:
Fundamental vs. Technical Analysis: Investors who use a fundamental approach believe that before buying a stock you have to look at the company’s current and prior quarterly and annual financial results, see how the company is rated by Wall Street analysts, determine whether institutional support is increasing or not, evaluate the industry and how the company is faring against competitors and, finally, assess how the firm will perform in the current domestic and international economic environment.
Investors using a technical approach assume that all those subjective evaluations are distilled into the stock’s price. More importantly, a view of the stock’s historical price trend reveals how the assessment of all investors has changed over time within the broader context of global economic and financial market conditions over time.
- Trigger Points: Stock prices either trend or fluctuate within trading ranges. By looking at a stock’s chart, a technician can quickly evaluate whether it is trending or caught within one of those trading ranges. Technicians believe that when a stock moves outside a trading range, in most cases, it launches a new trend. The best time to buy stocks, therefore, is when they cross out of a trading ranges and begins a new trend. Of course, the prerequisites for launching and continuing most trends are favorable industry performance and a rising stock market.
Watchlist Stocks: It’s relatively easy for an investor to scroll through hundreds of charts and identify those where the stock is currently fluctuating within and soon may likely break out of a trading range. When a clear breakout price can be identified, no further action needs to be taken immediately other than adding them to the Watchlist and waiting patiently for the breakout; stocks already far into a trend are ignored.
I like buying stocks when they break out of a trading range in what I hope could be extended momentum runs. In the rare cases when a momentum run fails to materialize after a trigger point breakout, I can usually sell with only a minor loss. If the momentum run does become a reality, the move can last for months and stack up gains in the order of 40-100%.
If you are interested in hitching a ride on stocks that have been trending for some time instead, they can be found by looking at the IBD 50, the StockTwits 5o or any of a variety of other lists. Be careful of stocks with extended momentum runs though because their runs can end at almost any time in a severe correction.