Wednesday, October 19, 2022

How to Find Winning Trades in a Bear Market

By Enrique Abeyta (View Archive)

In my Empire Elite Trader advisory, our main trading strategy revolves around identifying deeply 'oversold' stocks...

We can identify how oversold a stock is by looking at a technical measurement called the relative strength index ("RSI"), which shows how oversold or overbought a stock is relative to its history.

Historically, signals that a stock is overbought are a decent predictor that the stock may not go higher or may go down... But signals that a stock is oversold – especially dramatic ones – can be a powerful predictor of positive price action.

The key to our strategy, however, is not just finding any oversold stocks... but finding the right oversold stocks.

How can we tell which ones are the "right" ones?

We like to find companies that have been performing well operationally – growing and beating analyst expectations – with stocks that have shown good (if not great) long-term and near-term performance.

That last part – stock price performance – can be particularly challenging in down markets...

So how do we adapt our strategies to deal with a downward-trending market or an outright bear market?

One way is to look for the areas of the stock market where there continues to be some momentum and strength.

There is an old saying: "There is always a bull market somewhere!" While it doesn't necessarily feel like the case in 2022, there have been a few strong areas.

One particular area to highlight is the energy sector... But unfortunately, those stocks have not seen many sell-offs that would trigger our "below 30 RSI" alarm.

In fact, most of them have stayed at or near overbought levels for most of the year. Remember our point above about overbought signals not being as useful as oversold ones.

At some point, however, there will be a buying opportunity in the sector. Perhaps it will relate to some resolution of the Russia-Ukraine conflict or some other catalyst... and we will keep an eye out for those kinds of opportunities.

However, there have been other areas that have already performed well – mostly around other materials and commodities...

Take a look at our trade on Tyson Foods (TSN) back in March...

The stock had performed extremely well like many other agricultural commodity stocks and then sold off on some concern about future earnings.

Note the clear uptrend in the stock as it steadily moved higher from last summer. It actually hit an all-time high in February.

We recommended the trade at $85.73 per share on March 23, when the stock was trading at an RSI of 36. In this case, the stock had not gone below our 30 RSI level, but in adapting to the current market environment, we felt it presented a great opportunity.

This is another adaptation that makes sense in a tough tape. There is no specific "magic" around the 30 RSI level. If you can find great uptrends with solid companies and operational performance, it sometimes makes sense to widen the bands somewhat.

This trade worked out great, and we were able to close it out just three weeks later for an 11% gain.

Another type of trade is what we call the 'counterpunch' trade...

This is also an RSI trade but in a stock that is not in an uptrend. The key here is to focus on the highest-quality assets instead.

We did this with wireless tower operator American Tower (AMT) earlier this year.

These types of real estate investment trusts ("REITs") are some of the best companies out there and have been some of the best stocks of all time. They are essentially annuity and monopoly businesses with secular growth from increased mobile data usage... and they pay dividends. Sounds pretty great, right?

That's why these have been some of the best stocks of all time.

Across the past nine months, though, these stocks have just done OK... Given relatively high valuations as well as financial leverage, they are interest-rate sensitive.

Here is our trade on American Tower (AMT)...

You can see that AMT was clearly not in an uptrend. In fact, the stock has been trading close to where it traded at the start of 2020.

The stock has been trading somewhat violently in a range between $200 and $300 per share.

Given the quality and stability of the asset, this presents investors with a great opportunity. We are very confident that there is nothing wrong with the business, and so when it reaches interesting RSI levels, we feel confident buying it.

Similar to TSN, we are confident in the company's fundamentals even in the context of the current economic environment. This is also why the stock – while not in an uptrend – has held steady despite the market volatility and higher interest rates.

We put our trade on at $227.45 on February 23 and closed it out on March 30 for a 10% gain. When we put the trade on, the stock was trading at an RSI of 28. The tower stocks very seldom trade below 30, and when they do, they are awesome buys.

As noted above, that was the case here, and we produced a very profitable trade.

Trading in down-trending markets may be more difficult given the fewer great opportunities...

But they are out there, if you have the right strategy. And in Empire Elite Trader, we've used this strategy to amass an 87% win rate on our trades over the last three years.

That's why I love to hear from readers like Mark J., who wrote in to tell me...

[Empire] Elite Trader has been the most successful service I've subscribed to. These kinds of returns with this sort of batting average – again, never had a subscription like it.

I want all Empire Financial Daily readers to have access to this powerful, proven money-making strategy. That's why I just published a quick presentation where I share everything you need to know to get started... including how to claim a free year of my "Quick Cash System."

Get the full details here.


Enrique Abeyta
October 19, 2022