Yes, we think with proper means there are always profits to be made, so that the effort of actively managing personal investment is worthwhile.
We will go through examples and exercises not just concepts and thoughts in the following discussions.
If you are one of the 65% US investors, who has a handful of cash and doesn’t know what to do with it, this article is for you.
So, what to buy?
The stock market has been bullish since 2009.
Many stocks and ETFs seem very expensive.
Not a good idea. How to choose among 70,000 funds world-wide?
In addition, many of them did not do well.
“The average 2016 return of all mutual funds in the U.S. is -7%.”
How about ETFs?
How to select from the 1,600 ETFs available in the US?
Most ETFs are pretty much betting games on future trends.
Since Earning Channel follows the principle of trend picking and trend trading, it is useful for choosing and trading ETFs. We’ll talk about this in another article.
Let’s stick to the basic, buy real stocks. Something tangible and with financial statements easily available.
How about one of the stalwarts of Peter Lynch, or dominating consumer companies preferred by Warren Buffett?
Yes, let’s take a look at KO (Coca-Cola).
We are not here to debate whether to buy and hold KO forever, but to use KO as an example to go through how and when to buy for a profit.
A stalwart defined by Peter Lynch is a large company that has steady growth and can survive recessions. We use a simple table to exemplify the definition.
|Stalwart||Criteria||Original||Adjusted for bull market||Actual 2017/1/12|
|Company size||Market Cap||Top 100||Top 500||Yes|
|% Held by institution||> 20%||> 30%||Yes|
|Steady Growth||min5yearGR_EPS(Y)||> 5%||> 0.1%||No|
|Survive Recession||Total cash / share||> 1||> 1||5.93|
|Book value / share||> 5||> 5||6.05|
|P/B||< 3||< 10||6.8|
|Price matches Growth||PEG||<= 1.0||< 3||4.27|
|P/E trailing||< 20||< 30||24.58|
|Market Direction||Monthly up-channel or Wide flat-channel||Steady up to strong up|
In the table above, we give the original definitions by Mr. Lynch, adjusted for the bull market, and the current data.
We can see that KO has good cash and good book value to survive recession. But, for those who consider only fundamentals, he or she may probably stop at the growth of earning. In fact, the growth rate of the most recent quarterly earning is negative.
In addition, the trend of drinking soda seems to be on a steady decline. The management team seems to be over paid and doesn’t know what to do with the cash and brand owned by such a great company.
So, from fundamental aspects, it seems pretty bad for the current, intermediate, and future for KO.
So, why consider buying now? Definitely, we are not talking about buy-and-hold KO forever now.
Weighing the reward and risk, we’ll check if there is profit to be made based on the current price movement.
One of the methods to make profit, especially when the market is expensive, is to band-trading on stocks that have major corrections.
A stock with major correction and is suitable for band-trading looks like the following:
- The stock forms a long up-channel in the monthly chart. This means, the company has grown steadily in the past several years.
- The price reaches monthly channel-buy-point. The price has a major correction (>15%) from recent high. It is down from the upper wall, dropping down to the lower wall, and then bounced back into the wall. Notice that, it has to be back inside the channel. Otherwise, the fall is mostly likely to continue.
- The weekly chart forms a medium size down-channel. The price is at the upper wall or is breaking-up the channel.
- The daily chart forms a short up-channel. This daily up-channel can effectively break the weekly down-channel. Another way to break up the weekly down channel is when the daily chart formed a narrow flat channel and has a break-up itself.
We summarize the timing for making profit from a major correction below.
|Buying signal for a major correction|
|Shape & Scope||Direction||Duration||Hit|
|Weekly channel||down||mid to short||upper wall or break up|
|Daily channel||up or flat||short||channel-buy-point or break up|
Please be reminded, we use channel to protect ourselves from being overwhelmed by greed and fear, and to prevent us from betting or selling everything in one shot. If you are not familiar with channel, please refer to the definition at the end of the article.
The correlation among the monthly, weekly, and daily channels when the price reaches a monthly channel buy point is illustrated below.
Please remember to wait for the confirmation. The confirmation is when a daily up-channel is formed with at least two dips or legs. Don’t try to buy at the first leg. It may turn out to be a painful bottom fishing experience. That means the knife continues to fall down.
The forming of a daily channel may cause the break-up of a weekly channel, and a buy-point for a monthly channel.
Now, let’s see if KO meets the criteria. The monthly chart shows us, it has a long monthly channel, and the price is near a channel buy point. The weekly chart forms a medium size weekly channel and the price is near the upper wall (resistance) of the channel.
You can pretty much be able to guess when to buy now.
To make things easier for you and to buy at optimal timing, you can use Earning Channel’s action plan to set the timing and to simulate the purchase via auto-trade. To make real money you can use the alerts given by Earning Channel to place actual order to your broker.
Here is how to use the Action Plan. You can select either daily channel, weekly channel, or monthly channel to set the triggering alert. As shown below, when we use default setting, the system suggests you to buy at 41.09 for daily buy-point; at 41.83 for weekly break-up; or 43.37 for monthly buy-point. With the knowledge of the range, you can properly adjust the channel-buy-line by swiping it with your finger.
In case the price does not move according to plan, please protect yourself using the double protection offered by Earning Channel – stop loss and channel break down. Whenever you made a new purchase use daily channel’s break down to protect you.
This article tells you when and how to buy a stock with major correction. There is no guarantee that obvious buying signals given by Earning Channel will make you profit, but they gives you clearer direction and higher probability to win. Earning Channel also offers break down signal and stop loss mechanism for you to reduce risk.
Hope this article is useful to you.
Try out Earning Channel for free. It will protect you from panicking.
Basic of channel trading:
A channel is defined as a price wave moving along a pair of resistance and support lines, and these two lines are nearly parallel. In addition, the minimum criteria for a channel is to have at least two dips and peaks touching the walls of the channel.
To utilize channel for trading we add a few lines and points for optimal timing.
A channel buy line and a channel sell line are within the two walls of the channel. A channel-buy-point is when the price bounced back from the lower wall and back into the channel buy line. Similarly, a channel-sell-point is reached when the price bounced back from the resistance line. A channel break-up line often offers good timing to take profit, and a channel break-down for stop loss, in an up-channel.
For a down-channel, it would be short selling and covering. Channel break-up for a down-channel is the timing to clear the short position. Channel break-down for a down channel is a good timing to take profit from the down-channel.
The Earning Channel software, as well as the articles, tutorials and suggestions in the website and social media, are provided as tools and references to help users develop their own market analyses and make their own investment decisions. Users are ultimately responsible for the way in which they use this information to invest in the stock market. Nothing associated with the Earning Channel or the information presented in articles and tutorials should be interpreted as direct advice on buying or selling of securities