As you all may know by now, one of my favorite strategies to pull tasty profits from the market is “bottom-fishing.” Why? Because “bottom fishing,” when executed appropriately, is a trend reversal play. We buy an undervalued stock (or ETF) at a bargain basement price, and sell it at a higher price… sometimes a much higher price. In fact, bottom fishing describes what most everyone wants to achieve in the market, “buy low, sell high.”
Buy Low, Sell High. When I first immersed myself in the stock market, some twenty years ago, I saw the “buy low, sell high” axiom over and over again. It sounded like a smart thing to do. But it always painted a hazy image in my mind—similar to my yoga teacher’s counsel to “Be here now.” Both are great ideas, but rather vague. Where do you start?
If you’re supposed to “buy low”—how do you know what stock to look at to find that low price? Moreover, if you do hook a bottom fishing candidate, but you buy too early, and the stock dips even lower, how low can it go? And, for how long do you hang on to the flailing flounder in hopes that it decides . . . at some point . . . to rise off the “bottom” . . . and bring your money with it?
To answer those questions, and more, I have dedicated many hours to studying stocks in downtrends, and how, when, and where they “bottom-out,” and then climb into new uptrends. My objective: To pinpoint high-quality stocks that fall 15% to 20%, or more from recent high prices, and then slow their falls and gather strength (buyers) by moving sideways, in what we call a basing pattern. When these stocks gain enough traction to rise out of these rest periods, I want recognizable “buy” signals, where I can consider purchasing shares. If the upward price momentum follows through, I will ride the new uptrend for gains, until my risk parameters issue a “take profits” signal. This is “buy low, sell high” in action!
Fortunately, I enjoy researching. I’ve personally scanned thousands of price charts—and their uptrends and downtrends, and trend reversals from low to high. I’ve studied the charts of indexes and sector leaders and their ETFs. I went on to experiment with chart indicators. Which ones played best with bottom fishing price patterns price patterns to give the highest-quality buy signals? Which risk parameters work best for limiting losses and maximizing gains?
Once I answered those questions to my satisfaction, I developed an easy-to-follow plan for finding the most promising bottom-fishing candidates.
Plus, I developed a quick 1-2-3 method for confirming that my target “bottom fish” had promising fundamentals that would attract buyers to boost it higher. The end result of this study and research is the straightforward, easy-to-use process that I use to go bottom fishing for my own short-term and long-term trades. When Bill Wade asked me to share it with Weiss Educational Services students, I was happy to comply.
“How to Bottom Fish Like a Pro,” is a simple, step-by-step process that anyone with a basic knowledge of the stock market and price charts can use to learn how to reach the ultimate market goal for all of us, to buy low and sell high!
Community Health Systems delivered a no-hassle 30% gain in four months
Before I sign off, you’ll want to check out one example of bottom fishing: Community Health Systems delivered a no-hassle 30% gain in four months. Naturally, all bottom fishing trades don’t deliver those kinds of profits, but when it happens, it can really help boost your bottom line. Community Health Systems, Inc. (CYH) – Weekly Chart
|Chart courtesy RealTick|
As you can see on this weekly chart of Community Health Systems, Inc. (CYH), price dropped from its June highs of $51.29 (left side of chart) down to the following March lows of $35, a 31% drop. Subsequently, the health care provider churned through a base pattern (arrow) and then broke higher in May, reversing to the upside and into a new uptrend. Savvy “Pro” bottom fishers would have purchased Community Health at $40, and sold at $52 or higher, thus pocketing a 30% or higher gain in four months. Keep green on your screen! Toni Turner