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Ep 79: Strategy to Find Strong Stocks in a Down (Bearish) Market Day

April 7th, 2016

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Hey this is Sasha Evdakov, welcome to episode number 79 of let’s talk stocks, and in this episode I’d like to share with you a method to find which stocks are strong during a down market.

You can use this method in the inverse, meaning you can see which stocks are weak in an up market, you can also use it to find which stocks are strong during a down market.

Today we have a down market. Obviously the Dow jones was down 170 points, we’re coming into these highs over here of about 18000 on the Dow, so a pull back since bouncing off right around this 15720 level, it’s pretty extended.

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And if we look at the S&P, I have a few different levels that I’m watching on the S&P, but coming up to right around that range of about 2100, as we get into that range, we’re getting into the over extended range from where we bounced over in February, so if you take a look at that, at about 1850, right around 1890 level, now we’re watching this 2000 level.

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As far as a short term support, I was watching this level right here, for the lows we had 2040 and also 2050, so we broke that, can we come back a little bit from the 2000 bounce? Absolutely. Can we bounce tomorrow just because we had an oversold level? Yes, we could.

If you look at the SPY, the volume is starting to pick up a little bit, we had more trading action today than the previous day, when we had the bounce.

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And you have to look at this also on the IWM, as you see it, we have slightly a little bit more volume. We got 32.4 million versus 28.1 million to the upside the previous day. So we could have a couple of more down days.

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And also looking at the RUT, we had some issues coming into this level right here, we couldn’t get through it, so obviously, what’s going to happen, if they can’t go higher, they’re going to break them lower.

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There are different approaches

When looking at this, you start to wonder, which stocks are strong? Or which stocks have been beaten up the most? And depending on the type of trader that you are. If you’re trading and you’re looking to bottom fish, or you’re looking to see which stocks have a massive weakness.

There’s a couple of ways to approach it, you could say “which stocks are acting the weakest?” Because I want to short those stocks when we get a little bounce. So this is what planning allows you to do.

You’re looking at this market, and this is what you’re watching during this market because it’s a method to find which stocks are strong during a down market, or vice versa, which stocks are acting weak during a down market. So you could do this also in an up market as well.

In either case, the way that I use this is, I look at it, when you have a big day, a big up day or a big down day, doesn’t matter which direction, but you see which stocks are leading, and which stocks are not leading, which stocks are in the background kind of hanging out over there and not really doing much, because that means they don’t have that much fuel.

So the way I look at it is I like to have large day moves, either to the upside or the downside, because it also shows me which stocks are strong and which stocks are weak.

To give you an example, let’s look at today. Today’s action, if you look at the S&P, we have a pretty serious drop, if you look at the Dow jones, also pretty serious drop, if you look at the composite, which typically leads the market, also a fairly large drop.

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How it works

We can all agree that we have a fairly large and major drop in the markets. The way that I like to do this and look at it is, if I’m on a down day what I’ll do is I can sort some of the stocks, and I’m going to use this list of my top favorite stocks, the more popular companies for the time being.

I’m going to sort it by percentage change, I’m not sorting it by the net change, I’m sorting it by the percentage change, by how much these stocks are moving to the upside, or I could sort it to the downside, so I could do it the other way.

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If you have a different panel, trading platform, that’s perfectly fine, you can use that trading platform, I’m sure they have a percentage change in that platform.

Sort by percentage

So you take your list, whether that’s your whole Russell 3000, if you go into the whole index, and you go into let’s say the Russell 3000 components, now you get 3000 stocks. So what you want to do is sort it, now you’re sorting it based on the price action of the percentage.

The reason you do it by the percentage is because a $27 stock that’s moving 17% down, is a much more significant move than if you’re looking it on a dollar by dollar basis, because a $100 stock, can move $2 on a given day without a problem, but a $27 stock moving $2 or $3 is much more significant, because it’s a larger percentage to that company. So you’re looking at percentage related gain.

This is one of the reasons why the news on TV they talk about percentages, it’s because it’s relative to the company, it’s more directly related.

There are two directions you can take

When you look at this, and start sorting things, you can do it two ways, if you’re looking for stocks to the upside, if you’re ready to buy stocks to the upside, you’re looking at which stocks exploded today that are actually green? Because this tells you here’s buyers.

When I do this on a Russell 3000 component, and you can do this also on the common stocks, you can do it on this as well, but this will also get you these 50 cent stocks, which are not as useful.

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So if you use the Russell, it might be a little bit safer, or the S&P 500 index, if you want to do it on the S&P, you can also do it on the S&P 500 stocks as well.

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Wynn

In either case, if you’re looking at it on the S&P 500, I’m looking at this list and I start seeing, which stocks moved the most today? And the first one really that popped my eye was Wynn, and we talked about this on the members section for the critical charts, I talked about the sideways consolidation pattern for quite a while, and then we broke out of that.

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And you can see that we continue moving higher and we got upgraded on this stock and we have large volume so we have support right here, so this stock just continues to power higher

I believe it’s getting a little far extended, especially as we come into this range and level right here, this 100 level mark is typically an area of resistance, so you want to be really careful.

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Don’t jump into stocks right away

But here when I’m looking at this, I see this stock has buyers, so does that mean I jump into it right away? No, not necessarily, I could tomorrow if we had let’s say a massive buying day, I could add to this position, but the better approach is to take notes and see which stocks are acting strong, because these stocks will also have a pull back soon, and when they have a pull back, let’s just say this stock pulls back to 90, and let’s say we have 3 or 4 days of down market, and the stock comes back to 90.

And then the market comes around and then we have another week of popping action, that would be our time as it bounces at this 90 level to get into that stock, because this already confirms and tells you that it’s strong, even on a major down market, this tells you it’s quite strong.

You do have to look at this from a larger view point, meaning that we’re looking at it, it’s already slightly extended. And that’s when you wait for that pull back. You wait for it to come back a little bit, and on a few down days, like if we had over here, 3 or 4 days of down day action, you get into that stock and you hold on to it, and you get your bounce. The same thing when it happened over here when we were in march 8th, 7th, 6th.

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Do the opposite of what others do

We had a few days of down action in the stocks, and then eventually powered higher. So you’re waiting for those red days. You do things that are opposite to what most people think, because this is how this business works.

Then if you look at some other stocks, you can look at them in the same way, you can look at this and say ok, this stock was also on an up day, then you start looking at the other things.

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With Wynn it was pretty simple, because we had consolidation pattern, the stock was selling off for many months, actually a couple of years, and we started to get some trend reversal after the digestion pattern.

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SWN

But with another stock like this, SWN, this is the next one that’s been higher and you can see the difference between Wynn, we have 11% change, whereas this one is 4%, still quite a bit.

I’m looking and I’m evaluating, we have a down trend. Here we have an A to B, B to C and then a C to D action.

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Are we in a consolidation period? Or are we on a popping action? This one still, it catches my eye. Let’s say you like this stock, and I’m not saying I like this stock, I’m not recommending it, I’m simply saying, let’s say this one looks good to you.

It’s at a low level and volume is picking up right here over the last couple of days, you can see volume is picking up today comparing it to the last two days, we have a little bit of a lighter volume, and we’re getting some buying action on a red day, on a pretty serious down day.

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Find your potential entry point

Now what do I do? I look for my potential entry point, and where would that be? The safer place would be right here at these highs, where we were heading this resistance level, and that resistance level was right around 9.62 on the highs, over in January 28th, then we had another one February 8th. So let’s say you’re waiting for the $10 level, so now what you can do is, if the stock pulls back and you’re looking for a bounce, you can do a purchase at somewhere around this range, this range of 5.18, 5 dollars, 4.97, 5.65, right around that level, and then if you’re looking for a bounce, because we know the stock is acting strong recently.

On the longer term picture, we have a lot of selling, so you have to be cautious about that. But in this scenario, if you want the stock to prove itself, you can wait for that 10 dollar to clear, and then get in at 10.15, 10.25, 10.38, 10.47, you get in right around that level and now it gives you some opportunity to power higher.

Look at all the variables before making a decision

But to me, when a stock is moving well on a down day, it tells me to check it out. It doesn’t mean I need to jump in it, because now I have to look at the other things, now I have to look at the pattern, I have to look at the volume, I have to look at the price action and I have to look at over all my time frames. I have to look at the weekly, you want to check out the monthly, how are things going.

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Over here, I’m also looking, we had a major resistance level over here, and we had some other, where is the next support level? Where is the next potential? What can it get to? Maybe it can get to about that level, so you’re checking out all these different price ranges or levels and then you start making your plan.

In this one we had a lot of selling that came in over the last couple of months and the last year, but here now, it’s acting strong and potentially if it breaks this $10 level, 10.30 10.50 level, it could be a nice purchase one, because you could see the stock moving higher if the pattern continues, if the trend continues, if volume continues, because it’s acting strong. It’s showing it hand right now, because there’s a sea of red.

The problem with regular days, if you get a day that kind of doesn’t do much, or there’s like a regular day where the market is barely moving, you have half the stocks green, half the stocks red, it’s a little difficult to figure out and pick certain stocks, but the thing is when you have a sea of red, when we have mostly a handful of green stocks, right here, between this range all the way to up here we just have green, and then the rest of the stocks, as I start looking down on all of them it’s just a massive sea of red, red, red, red stocks.

A lot of stocks are selling off, they tell you something, they tell you a sign, they tell you a signal, so you can go to the next one.

COG

Ok, so here’s Cabot oil & Gas Corp, we know that these oil companies have been beaten up lately. I’m looking at it, so here’s the trend line, resistance level, if I look at the A-B, B-C, C-D pattern.

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And now I’m watching these different levels, and I say, let me look at this, this is interesting because this stock is moving well on some volume, the volume here is not big, but some volume in a sea of red stocks.

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If you don’t like a stock, go to the next one

Then I look at it. Ok, is it worth getting into? And sometimes you might say “I don’t like it”. Sometimes you might say, the volume isn’t there. If the volume isn’t there, some things aren’t lining up, you say next, you go to the next one.

You start evaluating this next stock, you check out the daily, you check out the weekly. You look at the volume, how’s the volume acting, how were the past charts?

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And again, if we look at the weekly, here’s out A-B, B-C, C-D price action, right there, and now are we in a digestive period? are we looking to power higher? So for me in this situation I see, we’re probably in a digestive period, because looking at this overhead volume, overhead supply, this could be a problem. This one I don’t like it, I’ll go to the next one.

So you keep doing this and you start looking at it but it tells you something by looking at these stocks that are green on a major red day, it tells you something’s happening.

MPC

Here’s this one, this one looks a little interesting to me, because we had a decline in volume over the last month when we look at this MPC, so the previous day we had an update. But then today even though we had a major red day, we had even more volume than the previous day when more buyers are stepping in.

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Something tells me about this stock, it tells me that this stock has some action, has some buyers, it could be short covering as well, but in this situation when you have this digestive period, it usually doesn’t mean short covering, especially in such a down market.

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It just puts up this signal for you to say “Hey, this one is one to pay attention”, and you could nibble a few shares here, and then add, when it clears these next highs of about 39-40 dollars.

When it clears this price level of $40 then you could see maybe higher prices, but you could nibble a little bit, because it shows you strength is coming.

Be careful

You do have to be careful if you’re doing this. This doesn’t mean you get into these stocks right away, the next day, what this means is, you wait patiently, because the issue here, when you have a sea of red, when you look at the S&P, when you look at the Dow Jones, when you look at the IWM, when you look at the RUT.

When you start looking at these things, they could roll over, especially, looking at all these different indices, QQQs, IWMs, RUTs, they could roll over, and if they do roll over, then you might see these stocks that are acting strong, the market can take them down with it.

You have to be really cautious that are you just in a standard pull back? Or are you in a heavy selling month or something to that effect, heavy selling quarter. Are you going to get a continuous bearish action for the next couple of weeks or months? Or is it going to be a year of bear market action?

One day doesn’t make a trend

Typically, if you’ve had such a strong pop, like this and then you have one day of pull back, one day doesn’t make a trend. If you see two or three more days of heavy selling action, that starts coming in, that’s where you start seeing some trouble, because with one day, you can take a look at any trend right here, you’re going to find, even on a healthy up trend that’s very positive, you’re going to find one or two red days In that move. So even here, if we look at this IWM over February to March period, we’re looking at about 26-28 days. We still have one, two, three, four, five red days. It’s not a lot, but we have five red days.

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If we look at a sideways action here of IWM, between January 14th and we go to February 5th, we have 7 green days and 9 red days.

This is coming off of a bearish move here, but still, 7 to 9, you’re moving sideways and you have about half and half, so that’s why I say one day doesn’t make a trend. Look at this moving average, how it’s basically coming into a flat area.

Hopefully this gives you a quick little insight about these stocks and you want to go down the line on these positive stocks. If they’re barely positive, it’s something to not really pay attention to, because it’s not as many buyers, it’s a little bit of buyers, but it’ not as significant.

What’s significant for one stock, may not be for the other

For example, a stock like McDonalds, 0.51% move is pretty good for a stock, it’s 65 cents, but for this stock it’s still pretty good.

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But for other stocks, if you look at it, and it might be like a $300 stock, like a Tesla, 65 cents is not significant.

Now you can do this same concept the other way around. If you have positive days, like majorly positive days, you can see what stocks are acting weak to see which ones you want to short.

Or, this is a big “or”, or you can look at it, if you’re in a negative day, you can also look at which stocks have heavy selling coming in, if you’re interested into shorting the stock, or if you want to short.

If you’re new to shorting, if you’re new to the markets, you don’t want to shot. But here on these big red days, I’m looking at a percentage of loss, and what I can do is see which stocks are selling off the most?

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What I could do is go down over the list again. Look at the Carmax over here. This is a major engulfing pattern right here.

And this wasn’t even on my list to show, but look it, what things show up. This stock could be a major one to short right here, especially if it clears 47.44 and we had continued action, because we have huge selling coming in, huge action coming into the stock, because we have an engulfing pattern on Carmax KMX, and we had a sideways action, stock tried to get above it, and major selling came in.

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This right here points it out for you right there, and you can set up a plan, you watch the other chart, so here you have the daily, you set up your daily plan, this is the support level right around that range and when it clears that, you can get in it earlier if you wanted to, but if you wanted to play it say you could wait until this clears this level on volume, and see for a second they follow through.

Because sometimes you get counter trend bounces on heavy sell of like this, so you want to watch this and see if you get a little pop or a bounce tomorrow, but if you get a follow through that would be the place to go short, if you’re interested in shorting.

Now what you do is you go to the next stock, you start looking. How’s the pattern looking like. Then you’re watching to see how is the volume coming in, right here, how is the volume picking up, is that volume heavy? Or is it light?

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Evaluate things

And in this case you can see we broke the pattern and we’re breaking lower here on a heavy volume. So that’s what you want to do, and you constantly just keep going and running through these stocks and looking and evaluating these things.

There’s a support line right there, we have a gap under here, which gaps typically fill, we’re starting to get into this region right here where the support level is, and as we break that, the gap will start getting filled and volume is picking up as well.

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You start looking at this and evaluating it. How is it moving? How is it reacting? Did it come into previous resistance levels? Which here in this stock it did. How are the fib levels? So if I take this all the way down to here, look how that lines up right there at the 50%, retracement.

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That’s what you’re doing, that’s what you’re watching, and it tells you which stocks are strong or which stocks are weak. And now you can set a plan for shorting, for going long, for seeing things, but that doesn’t mean you do it right away. Sometimes you wait a day or two, but it gives you a signal to see about the stocks.

The current market

If we look at our current market, just quick rundown, apple right here, pulling back, watch this support level right here, right around the 107 level. That’s where you want to watch, if we break this, we can see lower prices because it affects the Dow and some other indices very heavily.

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Here is AMTD, Ameritrade, breaking heavier volume, picking up, there’s that support line, boom, breaking, moving lower.

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Amazon, we’re holding fine on amazon right here, we are picking up a little bit of bearish volume action, but we did hold up very well right here, just due to the kindle announcement the other day. So I would watch this line level right there, if it breaks watch this line or level.

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If it comes back down here within the next couple of weeks, this could be a buying opportunity, but you do have earnings around the corner, so you want to be careful, and get rid of that position before earnings.

Then we have CMG, starting to break below this little support line as well, which mans on volume, you could see the stock come back to the 405, which is another 50 points.

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You also have Facebook holding this level, if it breaks this level, you could see lower prices coming back to 104, or around 96, just depends, depends how much action we’ll get, because we’re still consolidating. we’re still holding up, it’s one day sell off for now.

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First solar, here’s the resistance level, here is an upward trend line right there as well, and if we look at today, we do have some volume on the pull back. We did have yesterday a little pop on some good volume, but really we broke this support line on the trend, so the stock is acting weak. Remember, rubber band effect, which ones are over extended.

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Goldman Sachs, major selloff. If you look at the ABCD pattern, here’s the A-B, B-C, C-D and then we repeat this process again, A-B, B-C and you may see another C-D, which right now we’re starting to break this, if you look at the daily, which could create a C-D pattern, and that could be problematic for the stock, which will take it to, let’s see, approximately 60 points from there.

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You’ll probably see that stock coming back to about 100, but we’ll see, time will tell, it may not get there, just depends on how big the selloff is, and earnings are around the corner.

We got Harley Davidson, upward support line selling off, You can see the stock coming back from this price level, which really comes over to here, and if you look at the monthly, that’s really where that level is, really right there.

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We have McDonalds, we talked about powering higher, still continuing to move well, since breaking these patterns.

We’ve talked about this in the critical charts before. Take profits in the strength, right until they stop moving, but take half off and let the other half ride. This is what you do.

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Priceline, it’s coming into the support range, if you can’t hold here, watch out, bellow we do have this gap right here that will and may get filled if we break that level.

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Then we have Sherwin Williams. Right here, trying to pop a little bit we have a little bit of positive volume action, if you look at the weakly, you can see it’s coming into those multi-year highs, right around that 290, 292 level. So I wouldn’t jump into this one right away because of just the market. But you could see tomorrow’s action and this could be a positive one if the timing is correct and if you see the follow through day. You want to see a follow through day.

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Because sometimes these stocks pop higher, go higher another single day, isolate, and then roll back over. So they play around in that range. They fake you out.

Tesla is getting into the overbought area, a little over extended, especially as we get into this 286-290 level. So this stock had a monster run since this 140 level, basically 100 points in just about 1.8 months. So we had a monster move.

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We’ve talked about Exxon Mobil. Coming into this resistance level, you might see it come back to the 71 level, and potentially bounce there. But oil stocks have been hit a little bit hard. I wouldn’t be surprised if it just hangs out a little bit here, and maybe just a slight pull back if anything, because they are trying, they are attempting to move a little bit higher. Because these stocks have been hammered, these oil companies have been hammered. So they’re acting a little more fair value because they’ve been sold off quite heavily over the last year or so.

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That’s my little tip for you, for learning, watching and seeing how stocks move, react during down markets. And if you spot the positive ones, or look at the very extended ones, it gives you some insight on what you can do and what you can play with when you’re looking for the short side or when you’re looking for the long side, but that doesn’t mean you have to jump into them right away tomorrow when the market opens.

Be patient, allow things to digest. Sometimes give it an extra couple of days, two, three days because those stocks when they’re strong, they’re still strong two or three days from now, you want to confirm it, validate your analysis, validate your theory and then make a clear plan and execute.

Author: Sasha Evdakov

Sasha is the creator of the Tradersfly and Rise2Learn. He focuses on high-level education speaking at events, writing books, and publishing video courses on business development, internet marketing, finance, and personal growth.

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

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