Gone Fishin’ to Hook the Big Ones

We recently moved from Orange County CA, to Southwest Florida.

The people here are fantastic—friendly, courteous and helpful. And, in contrast to the high-tech, fast-moving pace that we were accustomed to in “The OC,” the lifestyle here is definitely unhurried and laid-back. In fact, it’s not uncommon to see a Mom-and-Pop store that’s closed up, and a sign hanging from the door that says, “Gone Fishing. See you in October.”

Come to think of it, I like to fish, too. In fact, one of my favorite trading specialties is to “bottom-fish” for stocks and exchange traded funds (ETFs). You might even compare it to the actual sport. First, I go to the location where my “fish finder” analysis shows the location of the best opportunities. Second, I locate a good candidate and then observe its behavior to see if it conforms to my criteria. Third, I bait my hook and drop my line in front of my chosen prey, and wait to see if it “bites.”

The first step, locating the best “bottom-fishing” opportunities, is perhaps the most important part of my strategy. This is the initial stage of planning, where I begin to scan for stocks and ETFs that have fallen from favor—perhaps 20% to 35% from prior highs. Of course my first question is, Why? What has gone wrong here? Is the condition repairable? Can this loser heal, and become a winner once again?

Second, once I’ve determined that my weakened candidate could eventually regain strength, I take the time to study its surroundings. This involves evaluating the market climate . . . is it a sunny, bullish market that should make it relatively easy to reel in my catch? Or is it a stormy, bearish environment that will rock my boat and make it more difficult to land my target successfully? And, how is my target behaving? It should be swimming calmly (forming an orderly base), not darting higher and lower in a panicky fashion.

Indeed, this step demands patience. Stocks and ETFs forming a calm and strong base can take their time to do so. If we become over-eager in a bearish market, or if we cast our line before the fish is ready to trend higher, we can end up losing our bait, at least a portion of it.

Finally, when we see the sharks (institutional traders and investors) arrive and begin to circle our attractive prey—and even nip at its tail—we know it’s time to execute. We drop our hook in front of its nose. When the “big one” bites, we set our hook (establish protective stops), and reel it in.

Below you can see a weekly chart of Best Buy Inc. (BBY). The electronics retailer rolled into a severe downtrend starting in April 2010. By the end of 2012, however, the “sharks” started to circle. And in January 2013, Best Buy began its epic reversal, soaring up its 12-week moving average for a 300% gain, providing savvy bottom-fishers and trend traders with tasty profits. (And keep in mind, if you only took a “chunk” out of the middle of this uptrend, you could still pocket great gains.)

Best Buy Inc. (BBY) Weekly Chart

Best Buy BBY

Chart Courtesy RealTick

“Hold it, Toni” you say. “Is bottom-fishing really that simple? Can I follow your three steps, such as “observe,” “plan,” and “catch,” and then haul in trading profits easy peasy?

Nope. Catching the big ones on a consistent basis is not “easy peasy.” And, there are risks. Just like any successful trading strategy, bottom-fishing for stocks and ETFs that have fallen out of favor, and then reverse to gain strength and trend higher again, takes study, planning, and strong mental and emotional discipline.

With that said, please know that I’ll be happy to tell you more about this strategy very soon. But right now, I’m busy . . . I’m goin’ fishing!

Keep green on your screen,

Toni Turner