Thursday, November 16, 2017

Keep your eyes open for stocks bucking the trend

As a breakout trader, I only ever go long on new highs, or go short on new lows. Therefore, while the longer-term trend in the general market is still intact, the recent pullback or consolidation (not only in the major market averages, but more importantly in lots of individual stocks), in theory makes it difficult for me to participate.

One of the reason I am continuing to run through my scans and keeping my watchlists up to date is that you may find individual stocks that are bucking the trend, so to speak. 

If the general market is falling yet some stocks are breaking out to new highs, they are exhibiting a high level of strength relative to the general market.

And, if those price moves are not related to recent news releases, then all the better. It shows that something is potentially going on with that stock, which the market at large does not necessarily know about.

Some of my biggest winners in the past have been as a result of going long during a phase of market weakness, or consolidation at best.

Way back in 2007, I went long on a US-based stock, Dryships Inc (some of you may recall the short-lived parabolic move this stock had last year). $DRYS started that year below the $20 level, yet this moved up to peak over $120, and I managed to capture a chunk of that move, all while the general market wasn't really going anywhere.

In 2008, I went long on US stock James River Coal (they subsequently filed for Chapter 11 protection in 2014 before being de-listed), which came up on my scans in the early part of the year and started moving up. 

At the time, is was a single digit priced-stock, yet over the next few months it rose until it peaked around the $60 level in June 2008 and again, I was able to catch a piece of that uptrend. This was while the US stock market as a whole in the early stages of its choppy downtrend.

You can also turn this round - if the general markets are making new highs day after day, yet an individual stock is making new lows, that demonstrates a high level of weakness relative to the market.

Looking for relative strength or weakness doesn't fit in to the the 'top down' theory which has been used successfully by lots of traders. I'm more interested in the price action of the stock I am looking to trade, rather than the whole basket of stocks making up an index.

I also talked here about how a small number of stocks can skew the movement in the indices, due to the way they are calculated.

A couple of years back I was fortunate to speak to a successful US-based fund manager who follows price trends in individual stocks. Indeed, he helped reinforce in me the belief about following price solely in what you are trading - something I had subconsciously gotten away from. 

At the time we spoke, his best performing stock was one he bought breaking out to new highs when the general market was going in the opposite direction. This he held onto for several more months and generated a healthy profit. 

By keeping your eyes open, and focusing on what price is doing in any individual stock, you may get into a profitable trend, in spite of what the market at large is doing.

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