When is a Good Time to Buy?

p>This is always a tough question. If you are a long-term investor you may adopt a more cautious approach and wait for clearer confirmation that a bull market is in the making. In so doing you forego some early profits but you are more likely to preserve your capital.

Traders who typically want to “punt” much earlier have probably already put their “toe” into this market.

You can still be a cautious investor and also be “putting your toe” in the market. Remember last week we spoke about sectors? In summary: in a market that appears to have bottomed there will be some sectors that are showing some promise – that is their cycle is not entirely in synchronisation with the overall market.

As a long-term player in the market I am constantly looking for opportunities that will provide me with an early profitable entry with low risk – I call this the stalking process – man is forever the hunter! But when you find your kill there is great satisfaction!

Whilst there are a numbers of stocks that have fired over the last month, their runs have been slowed somewhat. I am now looking for sectors/stocks that can sustain a rally – or at least show reasonable probability of continuing upwards. Before I talk about how I will identify opportunities I will emphasise that whatever stock I have stalked and selected I am also equally prepared to exit the stock if my decision is wrong.

So for now let’s look at how we might select a winner!

One sector that I currently like is Media. Its main redeeming feature is that it is coming off its weekly lows – it has so called “double bottomed” and whilst it could fall lower it shows quite good resilience and is likely to resist falling further. On a daily chart it is also currently displaying a strong upward trend albeit with some faltering in recent days like the rest of the market.

Having selected a sector – I scan the sector using a computerised system that throws up stocks that meet designated criteria. Two stocks, amongst others, that were produced in the scan results are PBL and SEV. At first glance I quite like both as they are coming off daily lows.

I look at a weekly chart for both and find that SEV is still in a downward trend – and I have no feel where the bottom is. PBL on the other hand seems to have consolidated. I also look at both stocks using my most important single indicator - OBV (on balance volume). OBV shows a relative graph of the relationship between price action and volume. Large volume days where the price is increasing show a steep rise in the on balance volume graph. Large volume days where the price is down shows a similar negative move on the graph. The size and direction of the move in the on balance volume graph is relative to the size of the volume traded that day and the size of the price movement.

I like OBV as it shows me where the “smart money” is going – and when the OBV is trending strongly it tells me there is strong support for the stock and that there is relatively strong liquidity in the stock at this time – that is important to me as if my judgment is wrong then I want to exit quickly and painlessly and I can do so if there is liquidity.

Applying OBV to SEV and PBL, PBL has a strong OBV whereas SEV is weak – and that confirms my decision to put aside SEV.

So this narrows my choice down to PBL but before I plunge in to the stock I also require that the stock is making higher highs and I identify points that I would like to see being taken out before I enter. A mistake many people make, in my view, is trying to buy “cheap”. On the contrary I am looking to buy when price is strong and showing signs of going higher.

If we look at the chart of PBL below we can see that the stock hit $8.56 on April 4, retraced and then recovered – I want to see the stock take out that high of $8.56.

I thought that might have been possible Wednesday or Thursday of last week but alas it did not happen – in fact the stock slipped and I have am somewhat disappointed in my choice so I will leave PBL for the moment.

I am not tempted to “punt” as I have a set of rules that have worked for me – these make up my Trading Pan. If I stick to the Plan then not only do I generally make profitable entries but I also preserve capital as my plan sets exit rules, which I will talk about another week.

One stock that I also liked that actually took out a new high was HVN. I also liked AFI and I would be expecting AFI to take out further old highs in this coming week.

So my answer to the oft asked question of “when is a good time to buy” is don’t ever turn your back on the markets as rarely is there a time – except in free fall – and these periods don’t generally last long – when there are not some opportunities in some sectors of the markets – so keep stalking!

In the meantime successful trading.

Tom Scollon
Chief Editor