How to Beat the Stock Market (3 Ways)
Stockscores Foundation for the week ending May 10, 2021
In this week's issue:
In This Week’s Issue:
- Stockscores Market Minutes Video – When to Buy an Upward Trend
- Stockscores Trader Training – How to Beat the Stock Market
- Stockscores Feature Strategy – Abnormal Breaks
Stockscores Market Minutes – When to Buy an Upward Trend
There is a right and a wrong time to be a buyer of a stock in an upward trend. This week, I explain a simple strategy for buying stocks that are going up. Analysis of the stock, crypto, gold and oil markets, the day trade of the week on TRQ and a Market Scan in search of stocks making pull backs in their upward trend.
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Commentary of the Week – How to Beat the Stock Market
What do I mean when I say, “beat the market”? Simply, it means earning a return that is greater than the market’s return. Historically, the average market return is about 8% but some years are better than others. If the market goes up 10% and my stocks go up 20%, I have beat the market. If the market goes down 10% and my stocks go down 5%, I have beat the market.
To beat the market, we must do one, or all, of three things.
Investors tend to chase after strength. We believe a company business is better when the stock is going up and if we think the company is good, we want to buy it regardless of price. This is called the law of upticks.
The result is that stocks are pushed up too far and, eventually, they have to correct downward. This creates an opportunity to short sell the stocks that have gone up to irrational price levels when they show signs that they are likely to correct.
The best signal that this is going to happen is to look for stocks have parabolic shaped upward trends and short them when the upward trend line is broken.
Just as emotion can send stocks up too much, it can also send stocks down too far. This is one of the hardest ways to make money in stocks because our intuition and emotional state will have a very hard time stepping buying in a falling market. Trying to catch a falling knife is a difficult thing to do.
Therefore, don’t try to catch a falling knife, wait for it to bounce off the floor first. This means waiting for panic selling to stop with a break of the downward trend line.
Fear based selling, especially when it is a correction of the overall stock market, create opportunity because everything is sold without much thought about the prices that are being accepted. When investors are feeling a knot in their stomach, they exit just to make the pain go away.
Consider the correction that we had last year. Everything was sold lower but, when the downward trend line was broken in March, prices started an amazing recovery that rewarded those who could buy when everyone else was in a state of panic.
Trade on Inside Information
This sounds like a fast way to go to jail, but it does not have to be. The stock market is not fair, some people get better information than others. They may get their better information because they are experts in an industry, have great sources for information or do good analysis. Usually the people with the best information are also the largest of investors with greater resources to uncover facts that most investors are not aware of.
When they know something important and act on that information, they create abnormal trading activity. This is the basis of my Action Candle indicator. It can be applied to any chart time frame to identify when there is abnormal buying. It is a tool for following those that have the best information and is extremely useful when combined with some other simple chart reading techniques.
Therefore, any trader who watches for the signs of investors buying with better information can benefit from their information without knowing what it is.
Whatever your trading approach, focus on these three types of trading opportunities, combine them with focus and discipline and you will be well on your way to beating the stock market’s returns.
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This week, I run the Abnormal Breaks scans for Canada and the US, looking for stocks breaking from predictive patterns. Here are two to check out.
T.CGG is breaking out of an ascending triangle pattern on the daily. Although it is up a lot already, this pattern provides a nice foundation for the next leg up.
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METC breaks a downward wedge with an abnormal price break today, good sign it can resume its long term upward trend.
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