Over the years I have discovered a technical buy entry signal that is highly useful in timing stock entries. While nothing is foolproof in the financial markets, this tool provides a serious edge when combined with common sense and the application of basic fundamental concepts .
The purpose of technical analysis to attempt to time trades based on movements and patterns in the price of a stock. Understanding when price trends are about to reverse is the secret to successful trades. Most investors wait for a trend to be well underway before purchasing the stock. This tactic can work in strongly trending markets, but trends have an uncanny way of ending as soon as they are identified.
Smart investors attempt to get a jump on the crowd before a significant trend starts to maximize the potential profit from the move. And the perfect technical tool for timing this type of move is called the Parabolic SAR.
Created by Welles Wilder, the Parabolic SAR consists of a series of dots on top of and below price bars on a chart. There is no practical need to understand how the indicator is derived since most online investing platforms have Parabolic SAR built into the charting function. Those interested, however, can click here for a detailed explanation.
As you can see from the charts below, Parabolic SAR consists of a series of dots that follow either above or below price bars, called candlesticks. When the dots print below the price bars, this is a bullish signal indicating a change of trend with the first dot. It also signals that traders should stay long, as the dots below the price bars represent support.
If the dots print above the price bar, it is considered bearish and the start of a downtrend. Remember, in an uptrend the dots are technical support. In a downtrend, the dots act as resistance.
Nothing Is Perfect
If the market is choppy or not trending, the Parabolic SAR can create multiple false signals.
The key is to look beyond the Parabolic SAR before entering the stock. Ask yourself if the message the chart is sending makes sense in light of the fundamental picture of the company. Is there a news story or a strong earnings report that supports the change in trend?
Using common sense and just five minutes of research can help prevent lots of heartaches when using any technical signal.
3 Stocks Flashing A Bullish Signal On The Parabolic SAR
1. Blue Apron (NYSE: APRN )
Blue Apron’s IPO has been a well-publicised disaster, and I would have never even considered this food delivery company had it not been for a bullish Parabolic SAR signal flash. Shares have plunged over 50% since the IPO two months ago.
The company is undergoing a complete reorganization, firing part of its recruiting team and placing a freeze on new hiring. However, this is not what has been bullish on the stock.
Looking behind the curtain, powerful activist investor fund JANA Partners has been acquiring shares in the struggling company. Yes, this is the same JANA that helped organize the Amazon/Whole Foods buyout.
It’s entirely possible that JANA will try to find a buyer for Blue Apron, assist the company get back on its feet by a strategy change, or even try to use the firm’s technology for another project. It could turn out to be quite ironic that the very activist that facilitated the Amazon/Whole Foods buyout that crushed Blue Apron may be its savior.
2. GameStop (NYSE: GME )
This video game retailer has been in a slow, erratic upward trend since hitting a low in mid-June. The Parabolic SAR indicator has printed one dot under the latest daily price bar, signaling additional upside is on the way.
As can be expected in the struggling retail sector, investors sold off the stock when the company missed bottom-line estimates in the latest earnings release. The numbers showed earnings of 15 cents per share versus projected EPS of 16 cents.
However, bullish news was completely ignored during the 8% selloff. The company crushed estimates for same-store sales, with gains of 1.9% compared to estimates of a 4.8% loss.
A surprise increase in sales is very positive for retail. GameStop also saw a 36% ramp up in collectible sales, a 14% increase in new hardware sales, and an impressive 28% improvement in digital sales year over year.
In this case, the signal flashed by the Parabolic SAR is backed up by strong fundamental improvements, strengthening the long argument for GME.
3. Monro (Nasdaq: MNRO )
This automobile service company’s stock just triggered a bullish Parabolic SAR signal.
Despite a slowdown in the sector, Monro reported solid first-quarter fiscal 2018 numbers with an 18% sales increase. I love the fact that the company has expansion plans for purchasing twenty new stores for an additional $13 million in annualized sales.
On the negative side, operating expenses are increasing while gross margins are decreasing due to recent acquisitions.
Risks To Consider: GameStop is a classic example of why nothing is for certain in the stock market. Despite the bullish Parabolic SAR and the compelling fundamental argument, the share price has plunged further. Always use stop loss orders and position size reasonably when investing!
Action To Take: Add the Parabolic SAR to your quiver of decision-making tools. Consider adding the stocks detailed above to your portfolio.
Editor’s Note: A few months ago, a group of millionaires and billionaires gathered in a private conference room 26 miles from Mar-a-Lago to discuss their “Trump Era” investments. And believe it or not, a common theme was to invest in American businesses. 7 companies in particular stood out… Full story here .