A Simple, Low-Risk Trade on the Selloff’s “Survivors”
There’s a bright side to the recent selloff…
With the tide washed out, we can see which trends have the strongest foundations. And now, we have an easy low-downside, big-upside way to trade them.
Classic investment wisdom says if a stock can hold steady or make new highs during a horrible market environment, it’s incredibly strong. The August 2011 panic crushed almost every major trend… But a select few stocks survived the market’s “stress test.”
Let me explain…
#-ad_banner-#Moving averages are a simple way to gauge the health of major stock market trends. The moving average takes all the closing prices over a set period of time and averages them together. If an asset is trading above that number, it’s in an uptrend. If an asset is trading below that number, it’s in a downtrend.
For example, Jeff Clark highlighted the 200-day moving average (DMA) as an important indicator for the big silver boom. Silver fell within a few percent of its moving average in June, only to rally again. It survived that stress test, and its uptrend remained intact. Today, silver is sitting close to a three-month high.
By the middle of last week, 90% of all stocks were trading below their 50-DMA. (I’m using the 50-DMA because it’s “stricter” than the common 200-DMA. About 20% of stocks were still trading above their 200-DMA at the end of last week. I’d rather focus on the best 10% of stocks for putting on a trade right now.)
The 10% of stocks that managed to stay above the 50-DMA were the “survivors.” They passed the test. And now, they’re poised to outperform over the next few months.
This select group includes some familiar names for Growth Stock Wire readers. The two best examples are Apple (AAPL) and Google (GOOG) – two of the “cash kings” I highlighted two months ago. Take a look…
Other notable names that made the “survivors” list include “Internet plumber” Cisco (CSCO), silver-royalty firm Silver Wheaton (SLW), wireless giant China Mobile (CHL), credit-card giant MasterCard (MA), and natural gas producer Range Resources (RRC). These names broke through their moving averages early in the week before rallying back later in the week.
As I said earlier, the 50-DMA “test” not only reveals the market’s survivors… it also gives us a solid “risk/reward” way to trade a market rebound. You can buy shares for a trade and place your protective stop loss near the 50-DMA. This limits your risk, while providing lots of upside.
The whipsaw action in the market is keeping many investors on the sidelines. But by focusing on this group of high-quality “survivor” stocks, investors can put on some low-risk trades with huge upside… especially if the entire market rebounds over the next month or two.