Helpful Stock Technical Indicators – Pt. 1

What stocks should you buy and When should you buy them?

I was listening to an investment coach today and he said something that made a lot of sense to me … and though I was in the investment business for 42 years … I never heard it stated as clearly as I did today.

“Fundamentals are very important when you are looking to buy a stock – but once you own it – Price is really what matters.”

I don’t think truer words have ever been spoken.  Unfortunately, most that get involved in the stock market are so obsessed with things like PE Ratios, PS Ratios, Earning per Share, Cash Available, Current Ratio, etc., etc., etc.!  Not that these are not important … they are … but the most important thing once you own the stock is the trend of the price.  If it is going up you are happy and if it is going down you are sad but have the outlook that it is going to go back up.  Therefore we tend to hold our losers in hopes that they will go up and sell our winners that are in fact going up.

In many of my writings of this past you have read where I said, “Make the trend your friend.”  Buy when the stock is going up and sell when the stock is going down.  You will never – unless you are extremely lucky – buy a stock at its rock bottom price or sell it at its all time high.  You would have to have a crystal ball.

You have also read where I said (or heard me if I ever consulted with you), that you should purchase your long-term holdings in companies that have earnings rising because that would signal that stock price rising … maybe.  I say “maybe” because this is not always the case.  Look at this chart of Alcoa (AA) in the 6-month period from 06/18/2018 to 12/17/2018:

AA 1
Figure 1:  Graph from Vectorvest Software

You see the red and green candles at the top show price declining while the blue line at the bottom definitely shows earnings rising.  So why is this?  Let’s take it a step further.

If you’ve played golf with me or set around a coffee shop listening to me spout off you may have heard something like this … “The only four occupations allowed to LIE and keep their jobs are Lawyers, Meteorologist (weathermen or women), Economists and Stock Analysts.”

I normally say things like this just joking around … especially on a day when …

  • the weatherman said we would have sun and warmth to play golf or ride the motorcycles and we end up having rain and cold.
  • Or about the lawyer who will get the guilty off as innocent knowing all along that they are guilty.
  • Or the economist who says we are headed for recession when we are not or that things are going to go well in the markets when they don’t.
  • Or the Stock Analysts says a stock is a “BUY” when in-fact it is a “SELL” or one you should probably stay away from.

If people in most other occupational groups were to blatantly lie, or even guess and be wrong, it could end up costing them money if not their job.  If you take your car to the mechanic and he fixes the wrong thing … something that was not broke … if he is a person of integrity he will fix the right thing at no cost to you … or at least “labor free” if other parts are involved.  If you are a barber or beautician and you cannot please the person setting in your chair with the haircut you are giving or gave them … chances are good you will not see them again.  If you are a doctor and make a mistake you may kill the patient or injure the patient which could cost not only in a malpractice lawsuit but the loss of your license to practice medicine.  If you are a financial advisor and purposely mislead clients to generate a commission for yourself it won’t be long before you are in a court of law or answering to the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA).  From experience you sometimes answer to the SEC and FINRA even though you did nothing wrong.

Should you listen to Stock Analyst?

Probably so … but you should also do your own investigation.  Take a look at the one year chart on Alcoa (AA) below:

AA 2
Figure 2:  From Vectorvest Software

Notice that I have blocked out the months of November & December of 2018 and January & February of 2019.  You will also see some numbers below the monthly abbreviations.  What are those?  Look at the graphic below:

AA 3
Figure 3:  Yahoo.com/finance

Notice here that in November 10 of 14 analysts rated this stock as a buy or strong buy.  Had you purchased … you would have lost money.

In December 12 of 15 analysts said it was a buy or strong buy.  Again, had you purchased you would be at a loss today.

In January 13 of 16 analysts gave it a buy or strong buy rating.  Had you purchased you could be at a loss today.

In February so far 9 of 14 analyst are stating it is a buy or strong buy.

Do you notice that no analyst has it as un “Underperform” or a “Sell?”  I wonder why that is? I mean after all … the stock price has been trending down since it hit a high of $62.35 way back on April 19, 2018 (not shown in chart above).  Why would educated stock analyst continue to recommend a buy … and why would anyone in their right mind purchase a stock for a long-term hold in say a retirement portfolio that is currently in a trend down.  Wouldn’t it make more sense to purchase a stock that is trending up?

What about Dollar Cost Averaging?

This may or may not be wise.  You have heard me talk or saw me write about the benefits of Dollar Cost Averaging in the past … but not as much about the disadvantages.  Dollar cost averaging can be very beneficial when over the long-term the lows that you purchase at are HIGHER than the previous low … but that is not the case if the Lows are LOWER than the previous low.  Look at the illustrations below:

Trending 1
Figure 4:  Uptrending Stock Illustration
trending 2
Figure 5:  Downtrending Stock Illustration

The real question here is do you have the guts to continue to poor your hard earned money into something that has a recent history of going down in price.  It probably makes more sense for you know to look at something going up in price to invest your money into … but since you don’t have “Crystal Ball” what can you use.

Technical Indicator 1:  MACD

MACD stands for Moving Average Convergence Divergence.  Don’t ask me how to calculate it … because I have no clue … and that is not the scope of this article.  If you need to know this you can “Google It” or go to school to learn all about it.

Below you see a six month chart of the Vectorvest Composite.  Vectorvest is a company I use for stock selection that rates … daily … more than 8,000 stocks in America and more than 19,000 stocks worldwide.  This Vectorvest Composite (VVC) is the arithmetic average price of all stocks rated in America (8,000 +) on any given day.  This price is shown in Candlesticks (red and green) at the top of the chart.  At the bottom of the chart I have added the MACD.  Review this and continue reading.

MACD 1
Figure 6:  Vectorvest Composite with MACD

In the MACD there is a blue line, a silver line and a yellow set of bars.  It is the bars that I pay attention to.  This is the Histogram which shows the difference between the MACD line (Blue Line) and the Signal Line (Silver Line).  The day that Histogram turns positive might be a good day to purchase a stock.

As you can see in the graphic on January 2, 2019 the signal line was at -0.9842 and the MACD Line was at -0.9799 … but the Histogram went above the zero line to a positive +0.0044. As for the price of the VVC it was (red) the next day … but then started to trend up nicely giving us 18 up days and 8 down days over the past 26 trading days.

Now how do you select stocks.  Well you could go into a graphic program and use stocks that you know by name or symbol and look at the charts one at a time.  Many of these are available on the internet and have studies like this one … the “MACD” and the next I will talk about in a moment “Stochastics.”  For examples, see the two graphics below (Fig. 7 and Fig. 8):

MACD 2
Figure 7:  Yahoo.com/finance for Alcoa
MACD 3
Figure 8:  Bigcharts.com for Alcoa

Both of these services are free.  I like the Bigcharts service much better than Yahoo.com simply because I find it easier to work with.  However, personally I use neither since I do have beautiful charts with Vectorvest and with the brokerage firm that I work with on my personal trading and investment accounts.  If you use a broker, I would suggest that you start by looking at the charts they provide and learn as much as you can about using them.

Now as I said before … you could use stocks that you are familiar with and look for stocks that would meet the criteria of going positive on MACD on the day you wish to trade … but you may look a lot of charts and come up with no trades.  For example, yesterday I ran a search for stocks in the S&P 500 index that had the MACD crossing above the signal line in the last 1 day take a look at what I got:

MACD 4
Figure 9:  Stock Search on Vectorvest

Out of 500 stocks … only five crossed the line on MACD yesterday.  How long would it have taken to look at charts on all 500 to come up with this few.  I’d probably still be looking and we are way past trading time since this is Saturday the 9th of January as I write this.

Now they are all good companies and I would not mind owning any of them … but I am not recommending you invest in them.  The purpose of this article is to show you that once you have an idea of where you want to go … there are ways to determine what to buy and when to buy.  What to sell and when to sell is another article for the future.

The Benefits of MACD timing:

Remember earlier I stated the MACD Histogram of the Vectorvest Composite moved into positive territory on January 2, 2019 … what would have happened if we’d done a search on that day for stocks in the S&P 500 index that did the same.

Take a look at this:

MACD 5
Figure 10:  Search Criteria and Stocks for MACD

Now on this search I only asked for 10 stocks so I got ten stocks listed.  I will show you one chart from these ten just to show that on January 2nd the stocks did cross into positive territory on MACD.  This is a chart of Applied Materials (AMAT).

MACD 6
Figure 11:  Chart of AMAT showing Price, Dividends and MACD

The yellow flags (I should have cut these) are only showing dividend ex dates and pay dates; pay no attention to them for now.  The top line (Red, Yellow and Green) shows if Vectorvest rates it as a buy, sell or hold; again, not important now.  The orange vertical line is the date line that shows the MACD did in fact enter positive territory on 01/02/2019 and has remained in positive territory since then.  And, of course, the red and green candles are the price action of the stock.

Now without even looking at the graphs … what would have happened had I blindly purchased all ten of the stocks shown  for my portfolio at the close of business on 01/02/2019 and held them until the close of business yesterday (02/08/2019).  Take a look:

MACD 7
Figure 12:  Vectorvest Quicktest of Searched Stocks using MACD

Now while it is true that the S&P 500 (SPX) has gone up 7.88% since 01/02/2019 … this portfolio of stocks would have gone up by 10.78% to provide an annualized return of 106.44% … which is almost 30% more than the S&P 500.

 

 

 

 

Technical Indicator 2:  Stochastics

If you are looking for a little bit faster of a signal to get you into stocks … you could consider stochastics.  Stochastics is an oscillator that is range bound between the values of 0 and 100.  It is quite technical to understand how it is calculated and if you are the type that needs to know … again “Google It.”

In my searches and graphs I use a 14 day and 3 day stochastics oscillator.  The 14 day is the longer term and the 3 day is the smoothing effect of the 14 day and a shorter term line.

In the partial graphic below (just showing stochastics) you will notice two horizontal lines at 20 and at 80:

Stochastics 2
Figure 13:  Stochastics Oscillator for AAPL

When the signal lines cross above the 80 it signifies the stock could be overbought (and may start trending down – not always though).  When the signal line crosses below the 20 it signifies the stock could be oversold (and may start trending up – not always though).  The time to consider purchasing the stock is when the signal line crosses above 20 to the upside – however, crossing below 80 to the downside may not be the best time to sell the stock as you would see if you looked at a few graphs.

Now if we go back to the Market Timing Graph in Vectorvest and look at the Vectorvest Composite with the Stochastics Oscillator we see the following:

Stochastics 1
Figure 14:  VVC with Stochastics Oscillator

We can clearly see that the signal line crossed above 20 on December 28, 2018.  Let’s look at a stock screen for this this time period.

Stochastics 3
Figure 15: Stock Search for Stocks crossing 20 on Stochastics 12/28/2018

Again, I could have gotten more … but all I asked for was the top ten stocks of the S&P 500 index.

So, if we would have purchased these ten stocks on 12/28/2018 at the close of the market and held them until yesterday at the close of the market … how would he have done?

Well, check it out below:

Stochastics 4
Figure 16:  Quick Test

During this period the S&P 500 (SPX) returned 8.94% while this little portfolio of just 10 holdings would have returned 13.57% (annualized that’s 117.97% per year or about 40% more than the S&P 500 Index).  Not too shabby.

 

 

 

 

Of course, all we have talked about in this article is when to buy and how to find stock to buy.  We still need to discuss when to sell.  That will be in a future article.

Until then … Enjoy your investing and make sure you read the disclaimer below.

Jerry Nix, Freewavemaker, LLC.

Disclaimer:

This information is not recommendations for you to purchase or sell any investments outlined in this article.  The information is being shared for educational purposes only.  I recommend that you seek the advice of a licensed and competent financial advisor before taking actions on your portfolio if you see a need to after reading this article.

The author of this article holds the following investments outlined herein:  AAPL, AMAT, INTU, INTC.

 

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