How to tell when its time to buy

How to tell when its time to buy

I noted on my last blog that there may be a buying opportunity coming in the next 2-3 weeks. I thought I would list a couple of short termed indications of a potential market bottom & pending turnaround point. This list is NOT comprehensive, and not all factors need to appear to indicate the potential for a bottom. But the list contains a few factors that certainly have proven useful in market prognosis. Here is my short list of factors to look for:
AD LINE

 

  • Divergences in market breadth: Market breadth simply measures the total participation of rising stocks vs. falling stocks. There are many indicators that attempt to measure breadth, and they are all useful. One of my regular indicators is the cumulative Advance/Decline line. Advancing stocks are pitted against declining stocks and added (net positive advancers) or subtracted (net negative advancers) to the line. You can see on the chart above (www.freestockcharts.com) that the thick black A/D line indicated the 2007 top  and the bottom in 2009 via divergence signals.

 

  • Choppy market activity—which we’ve had – followed by a strong reversal bar pattern where markets decline in the morning, then reverse to close higher or flat on the day. These formations can look like Japanese Candlestick “Hammer” days, “Doji” or “”Morning star” formations. Please refer to my book Sideways – or just Google these names to see what they look like. Each of them has one thing in common – a single day (or week)  of either intra-day reversal or an almost deadlock day of indecision that indicates the prior downtrend is about to complete itself. Below are charts of a perfect Doji formation that marked the 2009 bottom and a rough (not perfect) Hammer bottom in 2011.

S&P 2009 S&P 2011

  • Bearish media commentary & capitulation by retail investors. Media continuously reminds us of the current reasons behind the bear market, Fed policy (low confidence to raise rates), foreign nation problems (China) or otherwise. The media reminds us that these factors are expected to keep things bearish. Moreover, the individual investor who had previously been buying the dips stops buying. He/she has had enough of buying stocks, and is instead buying into the media’s bearish reports.

 

If you see these indications – followed by a big volume rally over 3 days or more – this may mean the “smart money” (institutions, hedge fund managers etc) are stepping in. it may be time for us to start stepping in as well!

 

Keith on BNN next Wednesday

I will be on BNN’s call-in show MarketCall Tonight on Wednesday September 30th from 6:00pm to 7:00pm. Tune in to BNN to catch me live on BNN’s premier call-in show, where viewers like yourself can ask my technical opinion on the stocks you hold.

You can email questions now to [email protected] – it’s important that you specify they are for me – or you can call in with questions during the show’s live taping between 6:00 and 7:00 pm. The toll free number for questions is 1 855 326 6266
Keith speaking at the MoneyShow Saturday Oct. 31st

Technical Analysis Explained: Using the Power of Technical Analysis to Profit in Upcoming Markets

Saturday, October 31, 2015, 3:30 pm – 4:15 pm

3 Comments

  • Keith, as always a good post. Gives us gun shy retail investors a reason to wait out the storm.

    Reply
  • Keith, whats your current view on your recent summer picks for stocks/ETF’s that were “safe” or provided good income to ride out the summer:

    Your picks were:
    – COW.to: -11%
    – KEY.to: -15%
    – che-un.to: -13%
    – DISney: -?% (I didnt buy this one)

    Most seem, after a few weeks, well below 200DMA, etc.
    Thanks, 😉
    -Bob

    Reply
    • Hi Bob
      That’s a good comment–glad you brought it up.
      Just like my comment re the market’s drop below the 200 day MA–the drop below the 200 day MA was prevalent amongst the majority of stocks (hence both TSX300 and more importantly NYSE broad index fell below that MA). When markets stage a broad sharp correction, you have to be careful in selling on signals would normally violate your sell rules. Instead, we made the pre-judgement of selling half of our stocks in April to offset what we felt was coming, then moved into traditionally lower beta stocks.
      On the subject of defensive stocks not being so defensive–you are correct in that Chemtrade and other defensive sectors like staples and utilities didn’t act so defensively. The problem with picking 3 stocks for a show is that you are always under-stating your entire portfolio–so I tried picking some out of our holdings that might be OK during a selloff, but obviously that didn’t happen. The best way to view our stance is to look at our equity performance or the chart on our recent blog entitled “Cut n fill”–you will see that, despite a few underperformers, the overall portfolio has been flat in the summer (down very little) and positive on the yr. vs. a negative market environment.

      Reply

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