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Strength in Weakness

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Posted by Tyler Bollhorn - StockScores

on Tuesday, 10 January 2017 06:52

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perspectives commentary

In This Week's Issue:

- Stockscores' Market Minutes Video - Trade the Evidence
- Stockscores Trader Training - Strength in Weakness
- Stock Features of the Week - Stockscores Simple Weekly Canada

Stockscores Market Minutes - Trade the Evidence
Traders can easily take trades for emotional reasons, we have to force ourselves to slow down and look for evidence that the trade is the right one to make. That plus my regular weekly market analysis and the trade of the week on GBX. Click Here to Watch

To get instant updates when I upload a new video, subscribe to the Stockscores YouTube Channel

Trader Training - Strength in Weakness
Simple approaches to any practice usually work the best. Finding the simple solution is not always easy, doing so can take the most experience. This is true in trading too and one simple concept to keep in mind when trading stocks is that there is strength in weakness (and weakness in strength).

What do you do when you are optimistic about a stock? Assuming you invest in stocks at all, you probably buy. When you are pessimistic, there is a good chance you sell.

 

Suppose there are 100 people who are allowed to trade the stock market and approach the market in this rational way. If 30 of them are optimistic about the market and 70 are pessimistic then there are 30 potential buyers and 70 likely sellers. The sellers are stronger and will likely push the market lower.

What happens when a pessimist sells or an optimist buys? The seller no longer has shares to sell and becomes a more a person who is more likely to buy in the future. The buyer now has shares and is a more likely seller in the future.

If most people in the market are optimistic, they are also likely owners of the market and less likely to buy in the future. The more optimistic the market, the more likely people will sell in the future.

If most people in the market are pessimistic, they have likely already sold and are therefore likely to be future buyers as prices fall.

Market strength is driven by optimism that is likely to turn to pessimism once prices get high enough. Market weakness is driven by pessimism that will eventually turn to optimism once prices get low enough.

That is why weakness brings strength, and strength brings weakness.
Keep this in mind when analyzing a stock. It is why I don't like to chase stocks that have been going up for a while. I prefer to buy just when stocks start to go up. I also like to sell just when upward trends are broken rather than sell after a stock has been going down for a while.

You can apply this thinking with a very simple chart analysis method. Use trendlines to define who is in control of the market and then look for a change of control. A downward trend means the sellers are in control so watch for a break of the downward trend to indicate the buyers are going to come in off of the sidelines and turn the market around. There is strength in weakness as long as you get the timing right.

I ran the Stockscores Simple Weekly Market Scan for Canada this week, using the 3 year weekly chart to indicate if a new trend may be developing. Here are two stocks that have a good potential to do well in the months ahead:

perspectives stocksthatmeet

1. T.LAM
T.LAM had a pick up in volume with price strength last week as it moved up through $0.35 resistance. Good turnaround candidate with support at $0.25.

1

2. T.SJR.B
T.SJR.B recently made a move up through resistance from a rising bottom after breaking its downward trend line last year. It has a 4.34% historical yield and good potential for capital appreciation as long as support at $26.50 is not broken.

2

References

 

 

Disclaimer
This is not an investment advisory, and should not be used to make investment decisions. Information in Stockscores Perspectives is often opinionated and should be considered for information purposes only. No stock exchange anywhere has approved or disapproved of the information contained herein. There is no express or implied solicitation to buy or sell securities. The writers and editors of Perspectives may have positions in the stocks discussed above and may trade in the stocks mentioned. Don't consider buying or selling any stock without conducting your own due diligence.

 


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