An Easy Way to Spot Pivots in Stocks

 

One of the best ways to make money on the Street is by spotting excessive bouts of fear and greed. 

In fact, that’s how some of the most famous investors made their money.

  • Warren Buffett taught us to be greedy when others are fearful, and fearful when others are greedy
  • Sir John Templeton, taught us to buy on “excessive pessimism”
  • Baron Rothschild taught us to buy when there’s blood in the streets

In short, they were buying when others were scared, and selling when others got too greedy. They were exploiting the very psychology of herd mentality.

And we can do much of the same.

Look at Foot Locker (FL) for example.


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In March 2018, the stock gapped from $46 to $38 after posting weaker than expected earnings.  However, it quickly became apparent the herd overreacted.

For one, analysts at Susquehanna Financial Group argued:

“Based on our checks and commentary by Foot Locker management in today’s press release, we believe the quality of product on the horizon and the flow of that product positions Foot Locker well moving forward. We would buy the stock on the current weakness.”

Analysts at Canaccord Genuity also argued:

“We believe Foot Locker is making the needed progress on turning around its business, thus positioning 2018 for the recovery we are looking for.”

Two, the stock became extremely oversold technically, highlighting overreaction.

  • Relative strength was at its 30-line, an indication of an oversold situation.  If we look at the last three times RSI was at the 30-line, we can see the stock bounced back shortly after.
  • Williams’ %R (W%R) was at its 80-line.  Again, notice what happens when W%R drops to or below its 70-line.  The stock bounces back shortly after.
  • The stock was also below its lower Bollinger Band (2,20).  Typically, when FL drops to or below its lower Band, the stock will pivot higher.

If all three indicators confirm an oversold situation, there’s a good chance it’ll pivot.

Or, look at Live Nation Entertainment (LYV).

Each time RSI nears its 30-line with Williams’ %R at its 80-line and the stock is at its lower Bollinger Band (2,20), we can see the stock has historically pivoted higher.

Granted, this strategy may not work 100% of the time, but it’s something to consider with each stock, index or ETF you choose to trade.

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