Buy Strong Stocks in Strong Industries or Sectors
"When you clearly see a move coming in a particular group, act upon it. But do not let yourself act in the same way in some other group, until you plainly see signs that the second group is in a position to follow suit. Have patience and wait. In time you will get the same tip-off in other groups that you received in the first group. Just don't spread out over the market. Confine your studies of movements to the prominent stocks of the day. If you cannot make money out of the leading active issues, you are not going to make money out of the stock market as a whole." -- Jesse Livermore..
Most traders know that the biggest gains are achieved in the stock market if they buy a stock when the market is strong rather than when it is weak. In a strong market, a stock that has just given a buy signal is far less likely to break down quickly and generate a sell signal. Stocks that generate a buy signal in a strong market do not have to "swim upstream" or fight against the market to make headway. In a strong market, there is a general positive mood that supports the bullish investor (and his stock picks). Such a market offers a generalized kind of support to most positions. However, the trader can also obtain more focused support. This is done by concentrating on the strongest sectors, industries, or groups.
Generally, you should not buy a stock in a group or sector that is declining. The sector is declining because there is some force in the economy that is working against those stocks. Otherwise the decline would be limited to scattered individual stocks and the entire sector would not be under pressure. The reverse is also true. When a sector is rising, the implication is that most of the stocks in that sector have a positive outlook caused by something in the economy that is favorable for those stocks.
Buying a stock that has had a buy signal when the stock is in a strong group sector or industry makes much more sense than buying a stock that has had a buy signal when that stock is in a declining group. A strong buy signal may say something positive about the individual stock. If the stock is part of a rising industry, then the economic environment is also favorable for the stock. In other words, the rising stock will have the "wind at its back." The strength of the stock will be reinforced by the strength of the group to which that stock belongs.
Therefore, if you see several groups that are particularly strong, then act on buy signals generated by stocks within those groups. Do not act on the buy signals of stocks in poorly performing groups. The traders at stockdisciplines.com would take this one step further. When looking for buy signals within the strongest groups, they concentrate on the leading active issues (the "blue-chips" of the groups). Those stocks have the highest level of liquidity and they are least likely to fail. Because their income stream is more reliable, stock trends are more likely to persist. Jesse Livermore would agree with this approach. While it is true that you can sometimes capture much larger moves in the stocks of little-known companies, the best and most consistent performance is achieved by controlling losses rather than by achieving spectacular gains. One of the ways expert traders do this is by focusing on high-liquidity better-known stocks and avoiding micro-cap stocks that have minimal liquidity.
Dr. Winton Felt maintains a variety of free tutorials, stock alerts, and scanner results at www.stockdisciplines.com has a market review page at www.stockdisciplines.com/market-review has information and illustrations pertaining to pre-surge "setups" at www.stockdisciplines.com/stock-alerts and information and videos about volatility-adjusted stop losses at www.stockdisciplines.com/stop-losses