In many ways today’s stock market doesn’t resemble your grandfather’s Wall Street. But some classic trading rules still deserve respect. These old-fashioned rules help investors time when stocks are buyable and determine which ones remain broken.
Thursday was an ugly day for many bullish investors. What had already been a nearly unprecedented historic correction now firmly rivals the worst blows of the financial crisis. Losses of 7% to 9.5% in the S&P 500 and Nasdaq Composite also squarely landed the broader averages in bear territory.
Each of the indices was well past the 20% threshold.
The reasons behind the selloff, other than sheer panic, aren’t a secret. From the U.S. government shutting off transatlantic flights to suspended sporting seasons around the globe, Thursday, pardon the pun, was a game changer for investors throwing in the towel in more than one way.
But if history repeats or simply rhymes, this is not the end of days. A study of past corrections ultimately always reveals a major bottom. Remember 2018 or 2009? Or if you’re a baby boomer, 1987’s crash? The one common thread signaling another kind of end is near was a bullish follow-through day (FTD).
A follow-through day typically occurs 4 to 7 sessions after an intermediate market low is established. Technical leadership from newer companies –which can become tomorrow’s new leaders — is also critical in establishing a bottom.
Move over Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT)? OK, maybe not. But investors should make room for stocks to buy like Tesla (NASDAQ:TSLA), Shopify (NYSE:SHOP) or even Virgin Galactic (NYSE:SPCE).
But what is a FTD? At its core, at least one market averages needs to rally by 1% or more on heavier volume during this critical window of time. There is a catch though. The 1% requirement is a minimum prerequisite.
During more volatile periods like 2020’s correction, a rally in excess of 2% and likely upwards of 3% is understandably necessary. This isn’t rocket science, but simply street smarts. Volatility is a two-way street. Think about what would happen if investors treated a smaller gain as the all-clear signal, and it was a false positive. That could prove very painful in a bear market.
Given the significance of a FTD, let’s give the bulls the benefit of the doubt heading into next week. Here are two stocks to buy, and one stock to short, just in case.
Stocks to Buy: Zoom Video (ZM)
Moreover, a growth-filled earnings beat supports the fact Zoom was already a big deal prior to Covid-19 stealing the show and burying the market.
On the price chart ZM stock also continues to demonstrate the type of leadership that’s storied among growth traders looking for the next big thing as a new bull market gets underway. The fact is while most assets have buckled under the correction’s pressure, shares of Zoom have continued to look technically healthy.
Currently, Zoom Communications has pulled back to test its cup-shaped breakout for price support. So far the key challenge is succeeding. And given a FTD, ZM is a certain stock to buy.
Stocks to Sell: 3M (MMM)
3M (NYSE:MMM) may have been — or might even remain — in your granddad’s portfolio. But the Dow Jones Industrial Average constituent is a stock to sell or short.
MMM stock has continued to be a technical dog in 2020 despite booming coronavirus-driven face mask sales. Not even all the headlines calling it a “buy” have helped much.
Technically, MMM is just breaching its last of many technical layers of broken price support as its stochastics sport a sickly looking bearish crossover.
If shares can establish a new low beneath $130 to confirm a failure of a long-term trend, bears should be able to make hay down to $100-$115 before any significant support comes into play.
Stocks to Buy: Starbucks (SBUX)
Coffee giant Starbucks (NASDAQ:SBUX) is the last stock to put on your trading monitor. Shares cooled off well in front of the broader market’s selloff. But now there’s reason to believe in a meaningful bottom emerging soon.
In a healthy market even the best stocks can expect corrections of up to 30%. Given today’s less-fit environment, SBUX’s 38% decline over the last several months doesn’t spell the end of days for shareholders. But that’s not the only reason investors should consider Starbucks as a stock to buy.
I am not trying to be dismissive of the coronavirus’ very real impact on families, businesses and the economy. But today’s pandemic will eventually fade into the sunset on both Wall Street and Main Street.
Further, as cases continue to decline in China — a key growth market for Starbucks — shares should rebound. As SBUX stock tests support between $51 and $62, it’s important to note that bottom isn’t coming today. But, nothing’s stopping it from finding a bottom as early as next week.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.