Satistying the Appetite of the Bottom Feeders...
Admit it. Sometimes when we see a stock that has fallen for many weeks and months on end, we sometimes become tempted to initiate a position believing that we have caught (or found) the stock at its absolute bottom. After several days or a week, we are often dissapointed to see the stock continue to plummet to new lows. Trying to call or catch bottoms in stocks is one of the biggest mistakes and errors that amateur and novice investors and traders make. In reality, it is really difficult and risky to catch a real bottom. Still, those who are fortunate enough to catch a stock at a true bottom are rewarded with a larger return on their invesment. So, are there any stocks that may be bottoming? Yup, there are a few. Lets take a look at them, shall we?
This is a classic double bottom-like pattern. I expect it to continue to drift between 123-128 until it pops up on some good news. But definitly a good time to add.
FNET
It looks like FLOW is bottoming out and ready to start its uptrend along with all the other attractive stocks in its group (i.e. ATU, LECO, HDNG, KMT, etc.)
RSCR
ALthough not a true bottoming stock, RSCR has just recently had its 50 day MA cross over its 200 day MA which is a true indication that it has bottomed and ready to head higher...
JDO
JDO is probably the riskiest stock out of the bunch. Still, I believe that JDO can easily double from this point. A nice, super-speculative buy.
With the Euronext deal done and the stock double bottoming at 80, it is safe to say that NYX has become rather cheap. The double-bottom pattern also offers a low-risk entry for those who are TA savvy.
ASVI
Yes I know, ASVI has already burned me once. Still, I do believe that it has put in a bottom (or at least it is close to putting in a bottom).
TOD
TOD is one of those low-priced stocks that make good long-term investments. For traders and shorter term investors, the stock is putting in a bottom (placed at the dip at 18.5) and is preparing to initiate an uptrend.
TBL
SJW
ICCA is a great long and a good bottom fishing candidate.
NMX
This is a classic double bottom-like pattern. I expect it to continue to drift between 123-128 until it pops up on some good news. But definitly a good time to add.FNET
Although it got hammered shortly after its debut, FNET is back with a vengence and ready to start a fresh, new uptrend.
FLOW
It looks like FLOW is bottoming out and ready to start its uptrend along with all the other attractive stocks in its group (i.e. ATU, LECO, HDNG, KMT, etc.)RSCR
ALthough not a true bottoming stock, RSCR has just recently had its 50 day MA cross over its 200 day MA which is a true indication that it has bottomed and ready to head higher...
JDO
JDO is probably the riskiest stock out of the bunch. Still, I believe that JDO can easily double from this point. A nice, super-speculative buy.NYX
With the Euronext deal done and the stock double bottoming at 80, it is safe to say that NYX has become rather cheap. The double-bottom pattern also offers a low-risk entry for those who are TA savvy.ASVI
Yes I know, ASVI has already burned me once. Still, I do believe that it has put in a bottom (or at least it is close to putting in a bottom).TOD
TOD is one of those low-priced stocks that make good long-term investments. For traders and shorter term investors, the stock is putting in a bottom (placed at the dip at 18.5) and is preparing to initiate an uptrend.
TBL
I love the boots but for a while, I couldn't stand the stock. Finally, TBL looks like it has put in a decent bottom. While the 50 day is light years away from the 200 day Ma, TBL has some room before it meets any resistance. I believe TBL is a good buy here. Add more when it clears the 200 day.
SJW
Although SJW was lousy pick when I recommended it a few months ago, I think that it put in a short-term bottom that nimble traders can play. I would long it here until it meets possible resistance at 36.
ICCA
ICCA is a great long and a good bottom fishing candidate.WRES
WRES is a last minute addition to this post. This is a good example of a stock that has bottomed out and ready to head higher. Notice that the 50 day is over the 200 day MA.
posted by Nick M. @ 8:25 PM
7 Comments:
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What do you do when you go after a bottom that just keeps sinking? Do you try and ride it out? For how long? thanks.
Mateo,
Well, first you should be very selective in the stock that you choose as a bottoming play. Sure, one could pick a stock that looks like it is bottoming when it is really just preparing for the next leg down. Mistakes do happen. But, if you do go long a stock, whether it is a bottoming play or one that is at a 52wk high), you should always have an exit strategy. You could set up a stop-loss or a mental stop loss where you would cut your losses no matter what. Some suggest anywhere from a 7-8% stop loss. If your playing it as a trade, you can have an even stricter stop loss, lets say 4-5%. But never try to ride it out. If you are wrong on an bottoming out entry, it is always best to admit it and cut your losses instead of letting them escalate. Because you never know how long you would have to ride it out and who knows if the stock will ever back up to that level (for ex-some dot.com stocks). My bad for the lengthy response, but I just wanted to be clear on your question. For the record, you should be very careful when buying stocks as bottom plays. They are riskier that simply buying stocks breaking out of bases or making 52wk highs. But, if done properly and the right time, it can be very rewarding.
Actually I greatly appreciate the lengthy response. I'm just getting into trading and have a limited starting budget, so I'm looking for the best method to build up my portfolio relatively quickly, so that I don't have to wait a year just to make a little bit.
If bottom plays are risky, is it worth it by waiting until the stock begins to rise again? How can you tell when the stock is on a legitimate upswing? For example, OPWV was going good until July 2006 an then sank. Now it appears to be on the rise again, but how do we know if this is just temporary or not?
Mateo,
Bottom Fishing for plays is definitly risky. All of the stocks that I mentioned may not be done bottoming at all. Its just that their technicals and chart patterns look as if they are bottoming or at least putting in a short term bottom. If you want to eliminate a whole heck of alot of risk, then letting a stock first start an uptrend is worth the wait. To see if a stock is preparing to start a new uptrend: First you must assess and examine the overall market condition. Is the market in an uptrend or a confirmed rally? If that is a yes (just as we have now) then it is ok to go long a stock. The second important thing to do is to check out the stocks chart. Plug in the the major Moving Averages (especially the 20, 50, and 200 day MA). If you really want to see if the stock has truly bottomed out, you want to see the 50 day MA edge over and above the 200 day MA. The 200 day MA is a long term trend indicator, while the the 50 day MA is a shorter term trend indicator. By crossing and holding above the 200 day MA, the 50 day indicator is indicating a bullish trend change. A good example of this can be found in the chart for a stock that I have recently talked about: RSCR. RSCR now has the 50 day over the 200 day. This is a bullish confirmation. ALso look at charts of ARII. Look the April segement of the chart (make sure the 50 day and 200 day MA's are plugged in). You will notice that the stock started and nice upward trend shortly after this trend change occured (when the 50day crossed over the 200 day). And to answer your question about OPWV, the stock was just simply no where near bottoming. Looking at the chart, the 50 day and 200 day MA's were very far apart. When a stock finally bottoms and settles down from a big fall, it trades sideways for a bit and it lets enough time to pass so that the 200 and 50 day MA's come closer together. We are seeing that right now on the chart. But still, the 50 day MA is still below the 200 day MA, so this can be a faulty upward trend. I would wait and see what happens with OPWV before buying. I would be careful about trying to catch a bottom in a stock. Since you have just started out, conentrate on grabbing stocks that are breaking out of fresh bases and cup with handle formations such as MPWR, DAVE,KMGB, ELP, etc). Bottom feeding should be something speculaitve and only a small part of your portfolio. Also remember that if a trade does not seem to be going right, cut your losses before theu escalate so that you can retreat and trade another day.
I hope this helps. If you have any other questions, don't hesitate to ask.
Thanks a lot. What do you look for in the 20 day MA?
I think I'm going to wait and observe stocks for a few weeks before I start buying. I want to make sure I know what I'm doing because, as I said, I'll be starting out with a small portfolio. I might ask for your opinions on stocks from time to time, if you don't mind.
With the 20 day MA, I look for technically strong stocks to use it as support (after a nice run-up) or as a launch pad before they run higher. I also use the 10day Ma in much the same way. The 10 day MA is used for the most volatile and technically strong stocks. For instance, a trader interested in grabbing shares in EFD ( a high RS, technially strong stock), could have used the 10 day MA quite well in initiating a position. If you look at a chart of EFD with the 10 day, 20 day and 50 day MA, you will notice that the stock only pulled back to the 10 day MA. Realizing this pattern, a trader could have utilized this information and established a position at 30 and slightly above 32 (look at the dips on a chart of EFD with the 10 day MA plugged in).
Since you are just starting out and playing with a small position, don't over-trade. Instead, practice with a paper portfolio and when you are ready, only buy strong, high quality stocks. That way, you can slowly grow your portfolio and minimize your losses by only picking top quality stocks.
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