Tim Reazor
Chief Investment Strategist
NorAm Asset Management
I’m often asked how to find buy points and when is the time to strike in a stock. Before we find a buy point we have to find a stock. For me it starts with a stock that is in the top 2% of the market. That means the stock is superior fundamentally and technically to 98% of all the stocks in the market. I’m not talking about OTC stocks in this 98%. I also get excited about increasing mutual fund ownership.
With the criteria for selecting a stock briefly covered let’s talk buy points. Generally you want to find the chart pattern, find the high point and set a point slightly above the high point as your buy point. Why? This clears you through resistance.
An even easier way is to look to the left-hand side of the chart, find the previous point of resistance and set the buy point.
Why Wait for a Buy Point?
You want to wait for a stock to break through a buy point before buying or you can slowly start to accumulate your position because you want to take advantage of the laws of supply and demand.
A stock breaking though resistance on higher volume does a couple of things for an investor. It demonstrates to you that there is demand from institutional investors. You need this for sustained moves higher. Stocks that are pushing to higher prices on higher volume also demonstrate conviction. Institutional investors don’t pay higher prices for stocks unless they think they are going higher. I could speak for hours on this topic. I used to do just that when I taught classes, but I’ll keep this brief. I’ll leave you with this last thought on buying on a stock breaking out.
As stocks are moving higher on volume, breaking through resistance with the backbone of superior fundamentals and technicals you begin to notice a phenomenon taking shape.
The phenomenon that is happening is that you begin to notice very few sellers on the move higher. Yes, there are some down days, but no real sellers of note on these days. How do I know? When a stock is falling in price, if there are scant sellers volume will be light. These are the red bars on my charts in the volume area. This means that when the stock was weak, on a particular day or week, no one was selling. Conversely when a stock is moving higher you’ll want to see institutional volume (green bars on my charts) surge higher.
When you see surging demand (volume) and price moving higher this means that there are few sellers. This also means that investors that want to buy shares will have to pay up. Why? Think about it. If you held shares in a stock that was moving higher what would get you to sell your shares? The answer? Somebody offering you a significantly higher price then what you paid for your shares. Always remember it’s a stock marketplace where supply and demand rules the day.
Let’s take a look at a few examples. Here’s a chart of Apple that brilliantly demonstrates the laws of supply and demand. I’ve circled the higher volume that coincides with higher prices for you.
Now let’s take a look at a stock I’m watching, Keurig Green Mountain (GMCR) Look at the recent price action. Can you spot the green volume bars driving prices higher? Also, notice how volume looked when prices pulled back recently. It’s very low. The tight trading action this week on lower volume is also very constructive. Of note the last institutional selling volume on a weekly chart occurred the week of March 28th of this year. I’ve labeled the buy point for you on the chart to help you drill home the points mentioned above.
I’m not buying GMCR as of this moment and neither is the shop. I’m waiting for my signals; I’m watching and stalking this potential leader.
A few more notes… This isn’t a recommendation. To learn how to scale in and size your positions properly for this market listen to the podcast from my radio show that I co-host with Danny Stewart. I cover this topic extensively.
http://www.thewallstreetshuffle.com/category/podcasts/
You can listen to the show live on Saturday’s at 10:00 AM – just click this link and bookmark it – http://www.iheart.com/live/1190AM-4276/?autoplay=true
You can also listen via the iHeart Radio app. Simply download the app to your smartphone and search for 1190 AM Dallas. There is even an alarm you can set to remind you of when our show is on.
If you want to come into my office and learn about credit spreads send me an email. It would be a pleasure to meet, bond and talk stocks together – tim.reazor@NorAmAsset.com
I often talk stocks and markets on twitter – you can follow me by searching for my handle – @TJReazor
I hope today’s newsletter helped.
Best Regards,
Tim
The information presented is for educational and entertainment purposes only. Opinions and information expressed are based upon information considered reliable. However, factors are constantly changing and should not be relied upon. You need to do and verify your own research.
Moreover, no reader or listener should assume that any information or discussion presented serves as personalized investment advice from NorAm Asset Management, Inc. or from any other investment professional, and is not an offer of solicitation for the sale or purchase of any specific securities, investments, or investment strategies. You need to have your own, individual investment advice suitable for your personal situation.
Investments involve risk and unless otherwise stated are not guaranteed.
