How To Trade Declining Stocks?
In this post:
- What stocks have been outperforming lately?
- What is one of the signals that helps me identify ‘winning stocks’?
- What role do news play in stock trend predictions?
It’s been a tough period over the past 4 weeks as investors try and gauge whether the economy’s growing too fast amid supply and labor shortages. As always, uncertainty is not the market’s friend.
While the broader markets have been chopping around during this relatively tough period, over the past week a select area of stocks are outperforming and appear poised for much further upside.
I’m referring to stocks that are reversing downtrends that began in late February into March when many Technology and other high-growth names fell out of favor amid a rise in interest rates.
Picking up stocks as they bullishly reverse a downtrend can be very profitable.
Below I’m going to share the key signals that will need to trigger before you enter a stock that’s been trending downward and is now reversing that downtrend and poised to trade higher.
Below is a daily chart of West Pharmaceutical (WST) which was one of many winning stocks from my MEM Edge Report last year.
In early April, the stock broke back above its 50-day simple moving average. This is the first signal: The stock must break back above its key moving averages which will signal a break above resistance.
DAILY CHART OF WEST PHARMACEUTICAL (WST)
Simultaneously, WST’s Relative Strength Index (RSI) turned positive (above chart) while its Moving Average Convergence Divergence (MACD) indicator had a positive crossover (below chart).
These are both momentum indicators and this is your 2nd confirming signal.
From here, secondary signals that help increase the odds that the downtrend reversal will take hold include items such as positive news. For WST, analysts were raising earnings estimates last Spring as the company’s products were instrumental in providing needed drugs for Covid patients.
In addition, if the stock’s break back above resistance (each of its key moving averages) occurs on volume, that indicates that investors – particularly institutions – want to accumulate shares and will boost confidence that the stock will trade higher.
Below is a stock that’s exhibiting the characteristics I’ve reviewed and this high growth tech stock appears to be in the beginning stages of reversing its recent downtrend.
DAILY CHART OF DIGITAL TURBINE (APPS)
As you can see, the stock has broken back above its key 10, 21 and 50 day moving averages. In addition, the RSI and MACD have turned positive.
As for positive news, the company recently reported quarterly earnings growth of 400% over last year. Further upside price action coupled with volume would have me removing the stock from the MEM Edge List and onto the Suggested Holdings List.
If you’d like to be alerted to when I turn bullish on this stock as well as receive stock market insights not seen elsewhere, go ahead and take a 4-week trial of my bi-weekly MEM Edge Report for $7 by using this link here!