How to Buy Stocks in Ugly Downtrends
As miserable market action continues, and many traders are too anxious to call a turn, here's a better approach.
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Overanxious bottom callers are feeling substantial pain on Tuesday morning as downside momentum continues to build. There was barely a bounce attempt before bids disappeared and stocks were sold into the abyss.
Breadth is running very poorly again, but what is most notable is that only 12 stocks on my scan have gains of more than 10%. That tells me speculative interest has completely disappeared, as traders have been slammed when they have chased strength. Upside moves have not been sustained.
The most significant danger in this market action is trying to catch a stock that is falling like a safe from the tenth floor. Even if you do manage to catch a slight bounce, the danger of another rollover is very high.
Traders are psychologically driven to try to catch the exact moment that a stock hits a low. Everyone likes to be declared the genius who timed it perfectly. The problem is that the only way to do that is to constantly make early calls.
The better approach is to forget about timing the exact low and watch for a shift in price action. Watch for a key level to hold and for buyers to step in and provide support under pressure.
One advantage of buying a stock after it has bounced a little is that the prior low becomes a clear technical level that can serve as a stop-loss point. For example, I discussed TeraWulf (WULF) on Monday. It hit a low $10.60 and is bouncing about 4% on Tuesday. That $10.60 is now a clear stop-out point. If you are a short-term trader and caught a move, then you may take some fast profits, but if you are trying to hold longer term, then that $10.60 is the level you have to watch at this point. If it breaks, there is a good likelihood the stock goes to $10.
There are many other examples like that.
A name that hasn’t found any support yet is PureCycle Technologies (PCT) . It is still declining and not finding a support level. I think the stock is a great value and will eventually recover, but I’m not going to make any big buys until it has some positive action and there are some signs of support level, like there is with WULF.
Stay patient and don’t be a serial bottom caller. You can rack up some sizable losses if you focus too much on trying to time exact turning points.
At the time of publication, Rev Shark was long WULF and PCT.
