What should I buy after the correction ends

CUWu answered 2 years ago …

The first part of the answer is that you must REALLY know the indications of when the correction is ending. This involves watching the internal market and not the external market.

The internal market is the market's breadth. There are different breadth indicators but the most effective ones to watch are probably:

1. "NYSE % 10-week". This call called "the percentage of stocks above the 10-week moving average." It is also sometimes called the "percentage of stocks above the 50 day moving average" (which is the same thing: 50-day MA = 10-week MA). There is a "NYSE % 10-week" and there is a "NASDAQ % 10-week"

2. "NYSE % 30-week". This call called "the percentage of stocks above the 10-week moving average." It is also sometimes called the "percentage of stocks above the 150 day moving average" (which is the same thing: 150-day MA = 30-week MA). There is a "NYSE % 30-week" and there is a "NASDAQ % 30-week"

3. The NYSE bullish percent index and the NASDAQ "bpi".

You will see them reverse higher in that order as these 3 indicators are inter-related. (First the %10-week will reverse higher, THEN the %30-week will follow, and THEN the BPI reverses higher.)

These indicators oscillate between 0 and 100 as they represent PERCENTAGES of stocks in an index.

These internal indicators typically reverse higher BEFORE the external market so the actual NASDAQ composite and NYSE composite, the S&P500 and Dow-30 may still be moving lower and lower while the internals move higher.

Now to answer the actual question:

There are two considerations when developing your shopping list of potential bullish positions. One is what sectors of the stock market were the strongest in the decline. Because the strongest sectors in the decline typically reverse higher first, and are typically the biggest winners in the next rally.

The second consideration (which is most important) is finding out which sectors are ACTUALLY reversing higher at the time that the correction ends.

I mentioned the NYSE and NASDAQ BPI charts. A % of stocks in an index. Well sectors have BPI charts too.

The "Bullish Percent Index" represents the % of stocks in the index that are on point and figure buy signals. So if the "NYSE BPI" at 30, then 30% of all stocks on the NYSE are on buy signals. WHen that number starts to move higher, that means that more and more stocks on the NYSE are moving to buy signals.

Same thing with sector BPIs. When the energy sectors's BPI moves higher, it means more and more stocks in the energy sector are moving to buy signals.

So I would look at the sector BPI charts.

You can find many of them for free here: http://stockcharts.com/symsearch/?$BP

The key is to look at the list, and click the box that looks like a tic-tac-toe game with Xs and Os which you'll find to the left of the BPI you want to view. When the column on the chart all the way to the right (which represents the most recent action) is in a column of Xs, it means the sector is moving higher.

For instance, you can see by looking here: http://stockcharts.com/def/servlet/SC.pnf?c=$BPFINA,P that the ENERGY sector is in a column of Os. (At the time of this writing 1/16/08 the reading is down to 16.30 - as you can see by looking above the chart - and by looking at the recent column of Os, you can see that the reading got as low as 12. In order to feel good about getting into energy stocks, you would first want to see the reading move a bit higher, which would cause the chart to show a new column of Xs - again, on the far right.)

Look at the numbers below the chart which represent the years. You can see that the energy sector hasn't been this over-sold at any point on the chart which goes back to the year 2000.

One final note and then I have to go...

The link I gave you shows you 10 sector BPIs. These are the major S&P sectors. But there are broad sectors within the 10 sectors. There are about 44 broad sectors. For example, within the energy sector, there is Oil drillers and producers, there is the Oil Service sector and the Alternative energy sector.

If you want to see BPI charts to narrow down to specific sectors, you should sign up for investors intelligence because they have BPI charts on all 44 broad sectors and they are extremely helpful not only because of that, but because they also show you 44 different sector %10-week and %30-week charts, AND once you find the sector you want to be in, you can use the service to find stocks in that sector.

In any case, you should focus on sectors first and then drill down to how you want to take advantage of it.

If you like energy, then look at either energy stocks or ETFs. Energy ETFs include for example: XLE, XOI, OIH.

One place to look for stock or ETFs within a sector is here http://www.nasdaq.com/reference/BarChartSectors.stm

Another place to look for sector based ETFs is http://www.indexuniverse.com/index.php?option=com_data&Itemid=26