It was nice to see some subtle signs of strength in the market today (11/1/12). By no means are we out of the woods, but I did notice a Day 6 Follow Through Day (FTD) on the S&P 400 Mid-Cap Index ($MDY). For those of you not familiar with the FTD concept, I suggest reading Chapter 9 in William O’Neil’s book: How To Make Money in Stocks.
If this is a potential near-term bottom, here are a few tips for putting new capital to work (assuming you raised some cash when the warning signs appeared last month).
1) Start slowly with a small number of light positions. Keeping positions light is a win/win situation. If you are right, you have a small profit to work with and more stocks will continue to setup. If you are wrong, at least you can stop yourself out with a small loss and wait patiently for the market to setup again. The key is to NOT rush in all at once! If a new rally is for real, there will be plenty of time to make money.
2) Look for strength! One of the biggest mistakes I see traders make is buying the beaten down stocks that have too much overhead resistance. I realize that everyone has their own strategy, but I prefer to buy stocks that held up well during corrections. The theory is that if they survived the past 6 week pullback, they have a higher probability of performing well if the market moves higher. A great place to look for new ideas is the 52-week high list.
3) Continue to do your day-to-day work and pay attention to overall volume. Make sure the indexes start to see some accumulation to confirm a potential new uptrend.
I went to cash on October 9, but I am practicing the above 3 steps in real-time and took some light positions today. If they show me a profit, I will continue to get more invested. If they stop me out, no worries, that’s just part of my process. I’ve said this a million times and I will say it again: Do your homework! If you want to succeed at stock trading (or anything else in life) work at it! This is the best time to look at charts because the next potential big winners REALLY stick out. Good luck trading!