Moving Averages: How They Should Really Be Used

Market commentators seem to love talking about moving averages. It seems like major market averages are always near an important moving average. One reason for this is that there are a lot of important moving averages, or MAs. Traders often follow the 200-day MA to assess the direction of the long term trend. They might add the 50-day MA to their charts to track the intermediate term trend and the 20-day MA can be used to determine the short term trend of the market. The result is a chart that looks like the one below. Looking closely at the chart, we see that prices frequently mo...
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How to Look for Cheap Stocks that Could Double

Peter Lynch called them “ten baggers.” It’s a stock that can go up in value by ten times, for example from $9 to $90 a share. These stocks are obviously difficult to find but in the past, they have shared certain characteristics. Spotting these characteristics just might help us uncover the future ten baggers. To begin with, a ten bagger will have to be a small company. We know that because it is just impossible for some stocks to increase in value by ten times. Take Apple (Nasdaq: AAPL), as an example. With a market cap of more than $800 billion, Apple would need to become an $8 trillion c...
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History Shows How the Stock Market Handles a Crisis

We often think we live in unprecedented times. But, the truth is, there is very little that’s never been seen before. Almost every event has a historic precedent and studying those precedents can help us understand how the stock market is likely to react to the current events. Let’s start with an event that appears to be unique. North Korea is developing a nuclear weapon. Some investors may believe we have never seen anything like this before. But, of course, we have. China spent more than a decade pursuing atomic weapons, a pursuit that at the time was every bit as alarming as North Kor...
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Cheap Defensive Stocks for a Bear Market

The news grows more and more ominous by the day. The economic news continues to disappoint. Global events are also disappointing. We can find unrest in Latin America, the Middle East and Africa. In Asia, there’s a threat of war. In North America and Europe, sluggish growth and political divides prevent action. These conditions could be the setup for a bear market. And, many investors are worried about that. It’s not just the news that worries investors. Valuations are high and the technical condition of the market is generally overbought. We’ve seen bear markets begin after these condit...
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A Deep Dive Into Stochastics

We often see indicators drawn on a chart. Many times, an analyst will not even explain why the indicators are shown. At other times, they will claim an indicator has some important meaning. Rarely, if ever, does an analyst support their claim about an indicator with facts. The truth is many indicators do not work as their proponents claim they do. They merely show the “well selected example” which is the one time the indicator worked perfectly. With this technique, the failures of the indicator are ignored. Even when they are visible on the chart. Well selected examples are not necessari...
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Cheap Stocks Analysts Believe Could Double

Analysts are almost always wrong. In an average quarter, for example, about two thirds of the companies reporting earnings will deliver results that exceed analysts’ consensus estimates. The consensus estimate is an average of all published estimates. Of the remaining companies, usually more than half miss the consensus estimate. That means, in a typical quarter, the consensus earnings forecast will be right for just 10% of the companies. Analysts are wrong, in other words, about 90% of the time. Despite that fact, analyst estimates are important to consider. Ignoring them because they a...
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When Is It Safe to Buy a Dip?

“Buy the dip.” We hear this advice all the time. Every market sell off, even a dip of just a couple percent, leads to a chorus of analysts telling us to buy the dip. Left unsaid is that every major decline and every bear market begins with a dip. As investors, our challenge is to distinguish the dip from something more significant. Doing this seems to require knowledge about the future. To be 100% accurate, it would require that knowledge. But, there are some useful guidelines investors can use to determine when a bear market is beginning. 1987 There is no doubt October 1987 was a bear ma...
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When an Overbought Indicator is a Buy Signal

The stock market is overbought. That is a common theme on CNBC as analysts talk about how extended averages are. They are certainly correct that the S&P 500 and some of the other major averages are overbought. But, that is not necessarily bad news for the bulls. Overbought is a term used by technical analysts to describe a market that seems to have moved too far to the upside. It usually results from a relatively rapid gain. After a market becomes overbought, technical analysts look for a pullback in price. The theory of overbought, and the converse of that idea which is an oversold ...
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The Best Trades for August, From a Strategy Up More Than 20% This Year

You may recall that we began sharing real time buy recommendations for a successful trading strategy at the beginning of the year. Each month, we provide a list of stocks that have historically delivered gains for the next month. This article continues with that process. And, as we have each month, we also continue reporting our results. The strategy is among the simplest seasonal trades possible. Few traders follow seasonal strategies although these strategies are often profitable. They are also relatively low risk because they limit market exposure to short periods of time. To apply this ...
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Magic Formula Stocks

There are a number of ways value investors hunt for stocks. Among the techniques is the Magic Formula, a trading strategy first detailed by Joel Greenblatt in his book, The Little Book that Still Beats the Market. This book was a New York Times bestseller and the book’s web site indicates over 300,000 copies are in print. The book completely explains a formula that screens for value investments. The author maintains a free web site that offers access to lists of stocks meeting the criteria of the Magic Formula right now. Before addressing the formula, let’s look at the question of wh...
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