The age-old philosophies of "Buy low, sell high" and "Buy cheap, sell rich" are the investing approaches every investor strives toward. Unfortunately, the task of uncovering qualified stocks is not as easy as the four-word philosophies imply. By qualified, I refer to an undervalued stock that is technically and fundamentally sound enough to appreciate in price. The challenge is not just limited to finding undervalued stocks; it is to identify those stocks that have exhausted their downward tendencies and are setting up for an upward move.
REAL WORLD
Uncovering Value In An Oversold Stock
by Tamalyn V. Crutchfield, CMT
This technically based trader walks us through one of her own trades, detailing the indicators she used and the decisions she made.
Here is my approach to identify stocks ready to advance. When screening for technically undervalued stocks, I utilize daily data and employ four primary traditional indicators -- the stochastics oscillator?, relative strength indicator (RSI)?, moving average crossover, and moving average convergence/divergence? (MACD). I also use the multiple time frame approach. Using this strategy, I use daily data to screen for acceptable stock candidates and then scrutinize the monthly chart for trend confirmation. Finally, I utilize the 60-minute chart as my entry timer.
When seeking sound, undervalued stocks, especially those with which you are not intimately familiar, it is important to have sufficient technical and fundamental supporting data. Even the staunchest technician will admit that fundamental confirmation is key to proper stock selection.
THE TRADE
My system screens daily data initially for two technical situations: First, the three-day RSI to cross above the 14-day RSI, and second, I require the 14-day stochastic oscillator crossover of the %K? and %D? to have values of less than 25. Once these criteria are met, I look at additional technical and fundamental data for confirmation.Baldor Electric [BEZ] was not a familiar name when I noticed it on October 10, 1996. I learned from cursory research that Baldor manufactures electric motors and adjustable-speed drives. The company sells these products to original-equipment manufacturers (OEMs) and independent distributors of replacement industrial components. More than 50 independent manufacturer's representatives market Baldor's products in the US and throughout the world.
On October 10, 1996, the closing technical picture for BEZ can be seen in Figure 1. The closing price was $19.00, the three-day RSI was 51.30 and the 14-day was 34.14. The %K was equal to 5.31 and %D was 4.01.
Excerpted from an article originally published in the October 1998 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 1998, Technical Analysis, Inc.
