When stocks are finding a bottom after a correction, buying the right stocks is crucial. Here’s a simple technique known as Relative Strength that enabled us to identify and buy $NET before it rallied to a +46% gain in our portfolio (in less than two weeks).
During the recent, intermediate-term correction in the stock market, the Nasdaq Composite and S&P 500 both pulled back approx. 11-12% off their highs.
Since top growth stocks outperform on the way up, they also typically retrace two to three times more than the major indices during a market correction (20-30%).
When corrections begin, we prefer to take profits in extended stocks and wait for new bases to form.
This is preferable to sitting through a potentially sharp pullback that could cause our positions to give back 50-75% of our gains.
That’s why we quickly took profits and minimized losses in ourWagner Daily model portfolio when the September correction began.
But the real question is how do we know when to get back into the market…and exactly what to buy?
Continue reading to find out how a simple technique known as relative strength helps you easily identify new, emerging leadership when the major indices are forming a bottom after a correction.
+46% gain in less than two weeks
When stocks recently began finding an intermediate-term bottom, the clear relative strength of Cloudflare ($NET) grabbed our attention as a potential buy setup in our swing trading report.
While the S&P 500 and NASDAQ were still well below their 50-day moving averages and trending lower, $NET reclaimed key support of its 50-day MA on September 21.
Cloudflare had also formed a “higher low” well ahead of the main stock market indexes.
The chart below shows the relative strength that $NET began showing before it blasted nearly 50% higher:
When a stock is already trending higher as the major indices are sideways to lower, this is what we mean by relative strength (not to be confused with the RSI indicator).
If a stock has so much relative strength that it trends higher even while the broad market is not, guess what happens when the major indices eventually rally as well?
The stock with relative strength rockets higher!
It also potentially becomes a new leading growth stock for the market’s next bull run.
Cloudflare – The buy entry and blast-off!
After $NET reclaimed its 50-day MA, we notified subscribers of a new buy setup in our Wagner Daily watchlist.
$NET subsequently triggered for buy entry in our report when it moved above the September 28 high (which also correlated to a breakout above resistance at $41).
As shown below, $NET initially wedged higher after our entry, but then exploded after setting a new high:
Currently, our $NET position is showing an unrealized gain of +46% in our model portfolio since our buy entry on September 28 (less than two weeks ago).
Now, we will continue to trail our sell stop higher to lock in gains when the inevitable correction sets in.
As always, newsletter subscribers will be immediately alerted of any action on the position.
In addition to $NET, we also used relative strength to find ideal buy entry points in $TWLO, $DDOG, and $PINS recently–all of which are showing significant unrealized gains since our entries.
Relative strength on multiple timeframes
Relative strength enables us to quickly identify potential leading growth stocks, and to enter at low-risk buy points–well ahead of the crowd that only buys obvious breakouts to new highs.
The best thing about relative strength trading is that it also works well on all trading timeframes.
Whether you are a swing trader holding stocks for a few days to weeks, or a daytrader who holds for a few minutes to hours, the concept of relative strength trading works the same.
Regardless of your trading timeframe, simply look for the stocks that are setting new highs and forming new uptrends ahead of the major indices.
If your stock follows through, it will likely outperform the gains in the broad market when it bounces.
But even if the major indices fail to find a bottom and keep heading lower, stocks with relative strength are also the last to fall–thereby lowering your risk as well.
Relative strength is a trading technique that works fantastically well to identify leadership in the market and to minimize your risk.