An effective Stock Analysis has a pre-established series of steps just as our profitable investing strategy has a set of pre-established steps.
Stock analysis is step 3 of the profitable investing strategy and assumes that Step 1 – Stock Market Analysis and Step 2 – Sector Analysis has been accomplished.
Certainly, a stock analysis can be performed independently of profitable investing steps 1 & 2, but an independent stock analysis without the first two steps will miss an assessment of when to buy a stock. However, its a great way to build a stock watch list while you wait until market conditions are more in your favor of future price increases.
Stock analysis really goes through a series of steps by itself.
First we will examine the sector that contains the stock. Second is an assessment of the stocks relative strength. Third is an analysis of the stocks weekly chart. Fourth is the analysis of the stocks daily chart. And fifth is an assessment of whether the stock is a candidate for immediate purchase or to be added to a stock watch list with an associated up or down alert.
Stock Analysis Step 1 – Sector Analysis
This is really a simple step and is mostly taken care of by the profitable investing Step 2 – Sector Analysis. Essentially, stock analysis step 1 is a screening step to remove any stock not trading in the strongest sectors. Said another way, we are only going to perform a stock analysis on stocks that are contained in the sector(s) that is(are) outperforming others in the market.
Stock Analysis Step 2 – Stock Relative Strength
The profitable investing strategy is always heavily focused, or driven by, the relative strength of any stock or sector.
Do not mistake this analysis for the Relative Strength Index, or RSI, that is commonly found on many stock charts. The RSI is a measure of technical momentum that compares the magnitude of recent gains of the stock to recent losses. This is an attempt to assess whether or not a particular stock is overbought or oversold. This measure has nothing to do with the relative strength used in the profitable investing strategy.
Profitable Investing uses a measure of the strength of the stock RELATIVE to the performance of the stock market as a whole AND RELATIVE to the performance of other stocks in the sector.
Think of this in terms of your favorite sports team. When a team is hot, and winning most of their games, you can say their relative strength compared to their peers (the other teams) is high. If you had to choose a team to win a championship game you would want to select the strongest or the hottest team going into the playoffs.
The Relative Strength of a stock is similar. In a stock market going up, within a sector that is going up, I want to own the strongest stock. The one that is outperforming the others. This gives me the best change of owning stocks that are going to yield a profit between when I buy it and when I sell it.
Stock Analysis Step 3 – Performance of the Stock on a Weekly Basis
Just as in Step 1 of the profitable investing strategy for the entire stock market, we want all our investing decisions to be correlated with the stocks performance on a weekly basis. We just simply use the same strategy used in the stock market analysis on the stocks weekly chart. This gives us our best chance of being coordinated with the stocks weekly trend.
Stock Analysis Step 4 – Performance of the Stock on a Daily Basis
Just as in Step 1 of the profitable investing strategy, for the entire stock market, we want all our investing decisions also to be correlated with the stocks performance on a daily basis. We just simply use the same strategy used in the stock market analysis on the stocks daily chart. Step 3 and Step 4 together ensures that we take on new positions when price increases are supported by two different time horizons.
Stock Analysis Step 5 – When to Buy a Stock
After the completion of Steps 1 through 4, we now have a fairly good idea about this stock. If any of the prior steps were negative then the stock is off our list for now. If all the prior steps were positive then we can continue to assess when to buy it.
Think of what this stock analysis process accomplishes.
We know how strong the stock is compared to the overall market and its peers in the same sector of the market. We know what the weekly and daily performance is like.
Essentially we use the stock analysis of the daily chart to decide to buy this stock now or or add it to a watch list or an alert list.
This whole process is a logical well though out way to filter stocks out that don’t meet the profitable investing criteria. The stocks that are left after completion of this process are the best candidates for profitable investing.
