Weekly Update: Only Trade Stocks That Do This
Good evening, and welcome to this week’s edition of Stealth Trades!
I ignore 95% of the stocks I look at.
The reason?
They don’t “trade well.”
Not all stocks are created equal. Some trend well. They respect key moving averages and break out strong from clean patterns.
Others are a mess. They’re up 20% one week and down 20% the next. They don’t follow structure. They move erratically.
This makes trading them a crap shoot.
The game of trading is all about putting the odds in our favor. I have spent the better part of two decades studying what makes stocks move and why. And the only edge I have found is in focusing on institutional favorites being actively bought by large funds.
These are the stocks that allow me to buy them from low-risk entry points with maximum profit potential.
I’ll show you an example…
This is Primoris Services, ticker symbol PRIM. It is an industrial construction company.
The stock is currently coming out of a textbook breakout pattern. After a 25% rally in January, PRIM consolidated through a series of shallowing pullbacks from left to right.
Notice how each retracement was shallower than the last:
This is a stock I would buy here. In fact, we did just that in my Alpha Stocks service yesterday.
PRIM is in the right group – construction has been a leading theme of this bull market and the area I am seeing the most strength right now.
It is also breaking out from a clean pattern which we outlined above.
But this stock also “trades well.” It has a history of making quick runs higher after patterns like this. I’ll show you what I mean…
This is a chart of PRIM from late-2022 to late-2023:
Notice how well the stock trades – steady up moves followed by constructive consolidation periods. No wild gyrations. No whippy price action. Just clean moves from tight bases.
Here are the 12 months leading up to present day:
Now let’s contrast that with another housing-related stock benefitting from the construction boom – Ethan Allen (ETD).
Take a look at this mess of a chart:
There are no clean trends. The stock does not respect its 200-day moving average. There are no clean bases. It reverses randomly and for seemingly no reason.
In essence, this is a choppy mess.
Guessing what this stock will do from one week to the next is a coin toss at best. I have no edge here.
This would be one of the 95% of stocks I pass on.
Am I too picky? Possibly. I also might be exaggerating. Maybe it’s more like 80% of stocks that look like this.
But you get the idea.
Whatever pattern you are trading, go back a little. How has this stock responded to that setup in the past?
If you are new to chart reading, stick to obvious setups. If a chart confuses you, move on. A year from now, it will take you 2 seconds to know if a stock is worth trading or not.
Knowing how to avoid the dogs is one of the best skills a trader can develop. Stock selection is key.
The bulk of your gains will come from picking the right names, not from buying at the perfect price. And the best stocks usually trade well.
Best wishes for your trading,
