Stocks Are Bouncing. Now Is the Time to Clarify Your Trading Strategy.
Here are several strategies I’m using for bottom fishing after corrective action.
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We have mild bounce action to start the day on Tuesday, but it is gaining traction. Typically, the longer the market can hold on to a bounce, the more buyers it will attract. Market players are nervous about jumping in too soon and being caught in a failed bounce, but they also hate to miss the opportunity to buy the lows.
It is the close that matters, but breadth is running well ahead of 2 to 1 positive, and the number of stocks making new 12-month lows has contracted to around 120. All the indexes are running with gains of about 1%, and there isn’t any strong rotational action. Once again, it is mostly index-driven rather than stock-specific.
I’m plotting my strategy for what may lie ahead. The first issue to contemplate is whether the correction is over. A V-shaped recovery in the big-cap technology names is not likely, but typically, oversold bounces are bigger and last longer than many people think is likely.
Outside of Nvidia NVDA, which I think has a solid valuation and potential for more upside surprises, I’m not interested in trying to catch moves in the other big-cap technology stocks. I was caught in some Amazon AMZN shares on poor earnings and have now dumped the rest of my position. I think I can find stocks with better potential upside in the near future.
After the sort of corrective action that we have had so far, there is a tendency to stick with the names that you hold and hope that they will bounce back. Typically, the stocks that bounce back the best are unlikely to be those that you hold on the way down.
When you have suffered a downdraft in your account, it is a good time to carefully evaluate each position you still hold and determine if it really is the best place for your precious capital. It is very easy to form an emotional attachment to a stock that you have been holding for a while, and it can be a positive thing to rid yourself of the baggage and move on to something else.
Another thing to keep in mind is that the goal shouldn’t be to buy a stock at the exact low. The goal should be to buy a stock when it is in the best position to start a new uptrend. Trying to catch the exact turning point is a tough task, and even if you nail the bottom, that doesn’t mean the stock is going to trend higher.
When I bottom fish stocks, I use two approaches. The first is to buy something that is very oversold and try to catch a quick bounce. Mereo BioPharm MREO, which I mentioned Monday, is a good example.
The second approach for longer-term positions is to wait for support to form on the chart. When you are doing that, you don’t typically want to buy the first bounce. It is better to wait for a test of support and then trade off that level. The prior low will be an easy and convenient stop-out point.
As I discussed in my opening post on Tuesday morning, I’m optimistic about the trading opportunities that are developing, but you have to be patient and not deploy capital too quickly. The likelihood is that we will see more downside volatility as we move into the worst time of the year seasonally.
At the time of publication, Rev Shark was long MREO.
