Finding The Stocks To Buy Or Short

04/25/07 08:54:41 AM

by Koos van der Merwe

Finding stocks to buy or short is easy, since there are many programs out there that offer tips. But how good are those tips?

Security: N/A
Position: Accumulate

What stocks to buy or short is a problem all traders face, whether you are a long-term investor or a short-term trader. Long-term investors look at the fundamentals, and buy when the stock meets their criteria. Technical analysts look at charts, and charts only. In many instances, the charts that give buy signals are usually those that have fallen badly for whatever reason and are starting to recover, either because of insider buying or because the Warren Buffetts out there have done their homework, liked what they saw, and started quietly accumulating.

Traders, on the other hand, often look for charts that have made new highs on outstanding fundamentals, pulled back as profits are taken, and started moving up again, as buyers may believe that the share price is oversold and/or short-sellers will start covering. Again, whatever the reason, finding software that will identify these trades is not easy. Not only that, but writing a formula strategy that chooses these profitable picks is even more difficult, especially when we know that the strategy can change in its success rate when the wind changes. Figure 1 shows the result of my latest strategy.

FIGURE 1: STRATEGY RECOMMENDATIONS. Here are the results of the buy/short recommendations using the strategy.

Graphic provided by: Excel.

Not bad, but then in a rising market as we have had over the past four weeks, we could have thrown darts at the page in the newspaper and succeed with what the dart hits. To prove whether my strategy — or luck — is successful, I will run the paper portfolio (seen in Figure 1) for another month. The temptation to buy is very strong, however, and if I yield to my weakness, I shall be sure to place a tight stop.
Figure 2 shows my latest buy using my strategy.

FIGURE 2: UNIVERSAL ELECTRONICS. Here is the latest buy using the strategy.

Graphic provided by: AdvancedGET.

Believing in my strategy, I would then buy the stock at current prices and hold it to the target calculated by the triangle of $37.35. More conservative investors might wait until the price breaks out of the triangle at $29.90.

The strategy I use was developed on OmniTrader Professional. Figure 3 shows the indicators. Note:

a. The first buy signal was given by the stochastic relative strength index (RSI) signal on April 13.
b. The signal was reinforced by FishMACDHigh on April 17.
c. Finally, the strategy voted a buy on April 19, as shown in the vote line in Figure 3.

Low-risk traders would have bought at point A when the price was at $27.41. The more conservative would have bought at point B at $28.85 and been upset, as the price fell $27.35 — the price that the vote line gave — a price I would have bought at and added to my portfolio.

FIGURE 3: UNIVERSAL ELECTRONICS, DAILY. This chart of this stock suggests that it would be a buy signal using the strategy.

Graphic provided by: Omnitrader.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.