Here’s a great video that shows one way to use a stock’s Relative Strength to identify a buy point, even before it’s cleared a proper chart consolidation.
Joe Fahmy uses a similar methodology to my own, where he combines fundamentals and technicals to zero in on the best stocks.
Relative Strength shows you how much a stock’s price action is outperforming the S&P 500. For years, I’ve used it as a method to screen for stocks with outstanding potential, and it has an excellent track record of reliability.
As Joe points out, when you notice that a market downtrend may be stabilizing, it’s time to begin scouting for names outperforming the pack. Many of the stocks he points out here – BEXP, CAGC, DNDN, GMCR, IPXL, ISRG, NETL, NFLX – are also names that I either own, or have been watching.
For example, let’s look at NetLogic Microsystems (NETL). The stock gapped higher on Febuary 3, after it handily beat fourth-quarter estimates.
It wasn’t until two days later, though, that the Nasdaq hit the bottom of its intermediate correction, and began a new rally attempt.
NetLogic was clearly among stocks with a price action outperforming the market, prior to the new uptrend getting underway.
With that gap-up, NetLogic cleared a five-week area of price consolidation. That would have offered an early entry point for investors who wanted to get in before a new market uptrend was confirmed.
For those with a more conservative approach, who wanted to wait for a follow-through day, another possible buy opportunity occurred on Monday, March 1, the day the Nasdaq confirmed the new uptrend.
On that day, NetLogic cleared a small area of consolidation, presenting another entry point above 54.63.
On a weekly chart, its Relative Strength line has tapered off a bit in recent days, but the stock continues to outpace the market. As in many cases, NetLogic could offer yet another alternate buy point, and is one to keep tracking.
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