We can all recognize a dog of a stock when we see one. It rolls over and dies.
Wondering if it is just ‘playing dead’, meaning it may be the exception, we look at the sector ETF and notice it too has gone ‘paws up’.
Successful traders learn to watch for the signs of life in multiple stocks within a sector. No sector stays dead forever. Going through the charts of a larger watchlist, you happen to notice one stock that is showing signs of life. Further down the list, you’ll notice another one that is now showing strong volume on up-close days and weak volume on down-close days. You note that it is in the same sector as that previous stock. Then you find another. You now decide to identify the strongest stock in that sector.
In the September 27th newsletter, I focused on US Steel (X), a stock in what had been a very weak sector (and the ‘dog’ stock in the first chart above). My comments were “US Steel does not have great fundamentals, but the steel stocks on a whole have been picking up. I usually prefer trades only on quality stocks, but sometimes I do small speculative trades when I see a high probability chart pattern.
X broke out of a five-month ascending channel. The volume pattern is showing accumulation, and the On Balance Volume indicator’s chart confirms it. …I would consider a small, stock-only position, with a tight stop-loss (such as the usual IBD recommendation of 8%).“
I didn’t mention it in the newsletter, but I did something I do for most stocks I highlight – I checked the seasonal pattern, the track record of the stock over the next several weeks. While X had a sideways pattern for the next few weeks, it had a history of sharp gains going through the rest of the year. Over the next 15 weeks for example, X had gained an average 17.8%, with gains in 18 out of the past 22 years, most of them being double-digit gains.
US Steel opened at 20.53 the morning of September 27th and has rocketed since then. X closed at 23.66 yesterday, up 15% over the 15 trading days since that newsletter.
X’s seasonal strength is just picking up. Focusing on the next 11 weeks, X has gained an average 20.1%, with gains in 86% of the past 22 years:
Other stocks in the steel sector are showing similar strength (although US Steel looks the best), so this rally should go on for a while. X could gain another 15% just getting back to 16-month highs. The Up/Down volume ratio is a very high 2.3, indicating strong accumulation is going on in the stock. Insider buying has been going on in the stock. Somebody thinks this stock has potential.
Minor pullbacks and breakouts from temporary consolidations would make good add-to-position trades, as I cover in Trading High Price Stocks And New Highs.
Of course, there’s much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, type in www.markettamer.com/seasonal-forecaster
Copyright (C) 2013 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.
Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg’s passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.
As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.
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