Summertime tends to bring a slowdown in trading activity and a summer slump. June is often the midterm for funds managers to reassess their held positions, make adjustments, rotate out of some positions in stocks and rotate into others. This creates choppy downtrending action and sideways patterns.
The summer is the ideal time to start looking for stocks for position trades later on and into the early fall. Often times traders will think of summer as a time to do less trading. In fact, the early to midsummer months often are the best times to be building your fall watch lists. If you wait until fall, most stocks will already be moving and your entries will be rushed, anxious, and full of emotion.
During the quieter summer months, there is time to watch, observe, and see the bottoming patterns that make ideal position trade entries. Platforms tend to show strength more easily and finding a great list of stocks for fall is simply easier.
So while most of the market is fixated on the sell side, and while most retail traders are attempting to find stocks to sell short, the position trader can take the contrarian view and look for stocks that are holding up well during strong down market days. By looking at the contrarian action you will find surprisingly sturdy stocks, defying the downtrend.
These stocks are worthy of further study and research to see if they qualify for your position style watchlist.
Stocks that defy huge down days like we had last week, and that are building strength during the weaker summer months are showing fundamental strength through technical patterns. Whenever you can combine technical strength with fundamental strength, you have a much better watchlist stock.
As an example, below we have OFIX which has been defying the downtrend of May and of June and has just completed an intermediate term bowl shape bottom by moving up with momentum and holding in a sideways pattern above the prior level. A minor retracement would be normal at this point but the stock is showing remarkable resilience.
Chart 1
And it is showing quiet accumulation patterns with the TechniTrader Quiet Accumulation TTQA indicator. This stock was found with the “TT RSI Strength Scan” which pulls up stocks coming out of bottoms and platforms with strength.
Contrarian technical analysis during correcting markets often reveals surprising results and can often expose watchlist stock candidates. All watchlist stocks must meet your personal criteria such as:
1. Your price range you prefer to buy into a stock. Price must be within your risk tolerance.
2. Sectors or industries you prefer.
3. Stocks, ETFs, Optionable all have to be considered. You must decide what you wish to trade in terms of instruments available.
4. Type of technical pattern. Some technical patterns will be easier for you to read and interpret than others, using only those technical patterns simplifies and streamlines the selection process.
5. Fundamentals you prefer. MetaStock has access to a plethora of financial data that can easily be incorporated into your personal criteria for screening of your watchlist potential stocks.
6. Risk tolerance. You must understand your personal risk tolerance and select only stocks that meet that criteria.
7. Upside target point potential. Most position trades need a minimum of 10 points target point potential to be worthy of your watchlist.
8. Support and Resistance: moderate and strong support levels need to be nearby and strong resistance should be non-existent or a long ways from the entry point for a good watchlist candidate.
Summary: using the contrarian viewpoint during a correcting market can reveal potential candidates for a position style watchlist. Stocks defying portfolio rotation selling, profit taking selling and dumping, tend to expose inner company strength in the technical patterns. This is a great place to start finding stocks for your position watchlist.
Trade wisely,
Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
http://technitrader.com
MetaStock Partner
(c)2011 Decisions Unlimited, Inc.
Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.
