There is a little-known method that could soon become very
controversial in theinvesting community, but if used correctly,
could make huge profits for investors.
This secret method has been proven in numerous tests and the
realmarket to provide a real, short-term entry edge for investors.
I came across this method while working at investment
research firm Connors Research, which studies how the stock market
really works by using a data-driven approach based on extensive
statistical tests and a massive database of past trades.
The stock market is designed to lure the maximum amount of new
investors into a stock at the wrong time. The technical setups that
look obvious are often traps to quickly relieve investors of their
hard-earnedmoney . In other words, the professional market players
are selling while the majority are buying, and vice-versa.
And what I discovered surprised me...
What I learned from practical experience as well as extensive
tests on data containing millions of stock trades since 1995, is
that buying stocks after a series of down days or lower lows
creates a greater short-term edge than buying after a series of up
days or higher highs. In other words, buying weakness, within
certain parameters, trumps buying strength.
Here are the three rules that provide a short-term edge to
1. The stock price must be above the 200-day simplemoving
This means the long-term uptrend is still intact. Buying only
stocks above their200-day moving average on the daily close helps
prevent buying afalling knife or stock that just keeps on moving
2. The stock must have fallen lower sharply or for at least
three consecutive days.
This drop in price creates the value that attracts professional
investors to the stock.
3. Therelative strength index (RSI) of the stock needs to
be less than 30.
I use theRSI , but not in the traditional sense. In fact, it was
discovered that the commonly used 14-period RSI provided zero
statistical edge for short-term investors. Therefore, it was
decided to testrelative strength using different time periods. The
testing was done by building abenchmark of the average percentage
gain/loss of all stocks, trading above their 200-day simple moving
average, during a one-day, two-day and one-week timeframe.
The amazing discovery is when the RSI periods are reduced to
two, a profitable edge is created. What was statistically proven is
that the lower the two-period RSI, the better the performance
against the benchmark. In addition, the opposite was also true. The
higher RSI, the higher the underperformance against the
Here are two stocks I've been following recently and how these
three rules prove that there's a profitable entry point for each of
1. Altria Group (
This "sin" stock y fits all three of the buying weakness rules:
- The price has fallen for three or more consecutive days.
- The RSI is well below 30.
- It is still trading above its 200-day moving average on the
The fundamental picture for the company is strong. Because it's
diversifying away from its tobacco core business with other
products,revenue is projected to increase 5% in 2013 and
major hedge funds are ramping up their positions. In
addition, the company has increased it's roughly 5.5%dividend year
2. The Limited Group (
The mall-based retailer of woman's clothing went ex-dividend on
Dec. 18, plungingshares more than 6% into the value "buy"
zone. This was a special $3 a
share dividend following another dividend payout in
August. Many companies are declaring special dividends ahead of the
potential tax increase in 2013. Looking at the company's
short-term technical picture, the RSI is less than 30 and the price
remains well above its 200-day simple moving average, creating a
compelling technical buying opportunity.
Future prospects are promising. Comparable store sales are
increasing month-over-month with a 5% rise in November. Not to
mention, the company has an aggressive international expansion plan
that should help lift the bottom line in the long
Risks to Consider:
It's critical tonote that just because a particular investing
method has been proven to tilt the odds of success in your favor,
does notmean itwill work every time. The tests are done on large
amounts of data and indicate an edge overmultiple trades, but not
every single trade will be a winner. Always use stops and position
size according to your account size and risk tolerance when
Action to Take -->
Both of these stocks are great buys right now based on the
short-term technical screen. In addition, the fundamental picture
is compelling for Altria. A close below the 200-day simple moving
average on both stocks can serve as the stop out level from today's
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