As of 10/29/2020
  Indus: 26,659 +139.16 +0.5%  
  Trans: 11,184 +237.90 +2.2%  
  Utils: 868 +2.32 +0.3%  
  Nasdaq: 11,186 +180.72 +1.6%  
  S&P 500: 3,310 +39.08 +1.2%  
YTD
-6.6%  
 +2.6%  
-1.3%  
 +24.7%  
 +2.5%  
  Targets    Overview: 09/29/2020  
  Up arrow29,300 or 27,400 by 11/01/2020
  Up arrow12,000 or 11,000 by 11/01/2020
  Up arrow915 or 840 by 11/01/2020
  Up arrow12,800 or 11,300 by 11/01/2020
  Up arrow3,700 or 3,400 by 11/01/2020
CPI (updated daily): Arrows on 10/23/20
As of 10/29/2020
  Indus: 26,659 +139.16 +0.5%  
  Trans: 11,184 +237.90 +2.2%  
  Utils: 868 +2.32 +0.3%  
  Nasdaq: 11,186 +180.72 +1.6%  
  S&P 500: 3,310 +39.08 +1.2%  
YTD
-6.6%  
 +2.6%  
-1.3%  
 +24.7%  
 +2.5%  
  Targets    Overview: 09/29/2020  
  Up arrow29,300 or 27,400 by 11/01/2020
  Up arrow12,000 or 11,000 by 11/01/2020
  Up arrow915 or 840 by 11/01/2020
  Up arrow12,800 or 11,300 by 11/01/2020
  Up arrow3,700 or 3,400 by 11/01/2020
CPI (updated daily): Arrows on 10/23/20

Bulkowski on How to Pick Stocks, Part 1

 

My book, Trading BasicsTrading Basics: Evolution of a Trader book., shown on the left, is the first book in a series of three called the "Evolution of a Trader." It will teach you about the four styles of trading (buy-and-hold, position, swing, and day trading).

If you click on the above link and then buy the book (or anything) while at Amazon.com, the referral will help support this site. Thanks.

-- Tom Bulkowski

$ $ $

How to Pick Stocks: Introduction

One of the frequently asked questions is how do I select stocks to trade? This page provides information on building a core group of stocks, ones you will want to hold for the long term. That may mean a year, three years, or longer. Michaels Stores, for example, was a stock bought out in 2006 that I have owned since 1989. So, yes, you can hold onto a stock for the very long term, and the longer you hold, the more likely it is to double, triple, or perform as well as Michaels. I bought and held shares from 1990 at a split-adjusted price of 88 cents and the buyout was at 44. That is nearly a 5,000% increase, and that is the type of return I seek from my core holdings.

How to Pick Stocks: One Approach

There are many approaches to stock selection and one that does NOT work is searching for stocks on the monthly scale, then the weekly, and finally the daily scale. What looks great on the monthly scale is trash on the daily scale.

Instead, do the reverse. Find a stock you like on the daily scale (or the scale you normally trade) then check the higher scales - weekly and monthly - to be sure the story is still compelling. If so, then consider buying.

Another method is to bottom fish. Look at stocks grouped by industry. If you find a stock making a new yearly low but it is the only one in the industry doing so, then stay away from it. Chances are it is a dog, a stock that may stay down for a long time while the others soar. Clearly, there is something wrong with the stock or else it would not be trading near the yearly low.

Look for entire industries that are weak. Then find a compelling situation within that industry. Take your time before you buy. Weak stocks have a tendency to get weaker and make new lows. When the bottom comes, price will make an ugly double bottom. The other stocks in the industry will be showing higher lows, too. If so, that might be the time to start nibbling. Price might still collapse, so be careful. Over the long term, a year or two, you will be buying near the bottom and setting yourself up for the double, triple, or better.

Buying an industry that is doing poorly takes courage. It is a dangerous play, but one that can lead to large profits over the long term.

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How to Pick Stocks: Approach Two

Bottom fishing, where you select weak industries, is risky because weak stocks and industries tend to remain weak, as outlined in One Approach. I have not had much luck bottom fishing. Remember the phrase that bottom fishing is like trying to catch a falling knife? You can get very bloody doing so.

Instead, much of my success comes from picking stocks and industries that are making new highs. These strong relative strength stocks and industries tend to remain strong.

I understand that it takes courage to buy a stock after it doubles, as in the case of a high and tight flag, but see if you can make it work for you. Buy stocks breaking out to new highs. Buy stocks that show a descending triangle with a downward breakout that reverses and then breaks out upward. These busted chart patterns tend to do well and if you combine them with being close to the yearly high, so much the better!

Buying at or near the yearly high means you don't have about overhead resistance setup by prior peaks or valleys because there are no prior peaks or valleys, only round number resistance (10, 15, 20, and so on).

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How to Pick Stocks: Approach Three

Go to yahoo!finance (http://finance.yahoo.com/gainers?e=us) and page down until you see Market Movers on the left side. Below that is the line, Most Price % Change. That link will take you to the stocks with the largest percentage change each day. Use the list as a spring board to stock selection.

How? Scan down the list for pharmaceutical companies or biotech companies. Research the stocks that interest you and do not buy. Sometime in the future, they will be cheaper than they are now. That will be the time to buy. Hold them, probably for years, until the value you seek is realized.

One financial consultant I know uses this technique to make incredible gains in the market, time after time, but she is willing to hold the stock until it reaches what she considers full value.

How to Pick Stocks: Industry Selection

I use a top-down approach, getting the big picture and drilling down to the individual stocks. I consider demographics, population trends, and other factors when I examine industries I think will do well over the long haul.

First, where do you find a list of industries? Yahoo!finance is a good place to start. They have an extensive list of industries: http://biz.yahoo.com/ic/.

As you scan down the list, ask yourself how you think the industry will do in the next 3 to 5 years. Will rising energy costs, an aging population, increasing medical expenses, the health of the economy, and actions by big government, hurt or help the industry?

Once you find an industry of interest, click on the profile (generally located in the center bottom of the web page) to read of developing trends in the industry. Not all industries have a profile, and many are duplicated.

Then, go to the library and pull out Value Line (Value Line). Value Line is a newsletter, nothing more, so treat it as such. But it does have a good reputation even though I have found its projections wildly optimistic.

At the end of the company index (on page 24), Value Line shows industries ranked in order of timeliness. Timeliness is an industry rank of the stocks in that industry for price performance over the coming 6 to 12 months. Value Line recommends you pick stocks from the top 6 industries, but I pick from industries I like and think will do well. From those industries I select companies.

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How to Pick Stocks: Company Selection

Let's stay with Value Line. When evaluating a stock, I look for the following on the Value Line pages.

These are the steps I go through when looking for stocks to add to my portfolio. Whether they will outperform or not is a different question. By 'add to my portfolio,' I mean I may monitor the stock for years and never buy it.

-- Thomas Bulkowski

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See Also

 

Support this site! Clicking any of the books (below) takes you to Amazon.com. If you buy ANYTHING while there, they pay for the referral.

My novels:  Bumper's Story Head's Law

Chart Patterns: After the Buy Getting Started in Chart Patterns, Second Edition Trading Basics Fundamental Analysis and Position Trading Swing and Day Trading Visual Guide to Chart Patterns Encyclopedia of Candlestick Charts Encyclopedia of Chart Patterns 2nd Edition Trading Classic Chart Patterns

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Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.
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I may not be right, but I can sure sound like it.Smiley