The 200-Day Moving Average & 3 PowerRatings Stocks for Traders
The year was 1999 and the internet boom was in full bloom. Millionaires were being made from average investors daily. It seemed like the fun would never end in the wild and lucrative world of internet stocks.
A close friend obtained information regarding a new start up called eToys. I’ll never forget his frantic phone call begging me to join him on the investment. The hype of the bubble had full control of his decision making. He was spewing words about how he was going to be driving Ferrari’s and living in Monte Carlo as a humble stake in the firm was promised to quickly turn into millions. He borrowed money from his family, cleaned out his savings, even mortgaged his home to keep buying this “sure thing”.
As the bubble burst, eToys was one of the biggest casualties. My friend kept buying on the way down saying if you liked it at 80; you’ll love it at 50 and so on. This company was a classic case of being in a death spiral. However, my hype-blinded friend didn’t notice that he was simply throwing good money after bad and the company was never going to come back. Finally, even eToys itself threw in the towel giving up in February 2001 with a bankruptcy filing and a share price under a $1.00.
It was obvious to even a rudimentarily trained market analyst that this company was in a death spiral. The first clue was the unbelievable hype surrounding it. Super hype never lasts often ending in massive losses for everyone not savvy enough to realize what’s happening. However, a more practical and easier “to know for sure death spiral” test is whether or not the stock price is above its own 200-day Simple Moving Average. Our tests have clearly shown that shares above their 200-day Simple Moving Average often continue higher after a pullback. Those trading below their own 200-day Simple Moving Average, a bounce back becomes less likely with a death spiral all the more likely to occur.
The Key to avoiding the dreaded death spiral is to only buy stocks on pullbacks that are trading above their 200-day Simple Moving Average. Once this average is broken on the downside, all bets are off if there will even be another bounce in the stock. Had my friend listened to this tidbit of tested market wisdom he may have been living the good life now instead of the daily grind in an office.
Here are 3 stocks that have pulled back but are still above their 200-day Simple Moving Average for your consideration:
Aegon
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Given Imaging
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GIVN |
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Sinovac Bio
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SVA |
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David Goodboy is Vice President of Business Development for a New York City based multi-strategy fund.