Picking Stock Tops and Bottoms Using Seasonal Analysis

People always want to pick the tops and bottoms in stocks. Frankly, it can be done when you're lucky, but it can't be done all the time. Why? You usually can only identify a top or bottom AFTER it has happened.

If you try to pick the top or bottom to the day, the issue is not that you can't do it but the repeatability of the process for making money. Plenty of people have gone bankrupt with bottom picking and top picking.

The better question therefore is, "How close to a top or bottom, after it has occurred, can I identify it as a likely top or bottom so I can get in or out of that stock?"

We use an approach that works with enough repeatability across hundreds of shares that we have a better chance of finding situations where we can apply it time and again. We apply seasonal analysis market timing to a portfolio of stocks, covered in our newsletter, and then decide which ones are following the pattern close enough that we can put on a confirmation trigger AFTER the anticipated high or low to enter a trade.

Rather than saying "I've got to pick the top/bottom in IBM" you can scan hundreds of shares and find those which have all the characteristics of a top/bottom because the stock has just turned after a projected seasonal/top or bottom. If it then triggers a price move upwards or downwards, you have a low risk trade entry. It's all a matter of managing risk, and this is one of the best ways to cut your risks while participating in some very large moves.

Does it work? Let's look at our July 2010 newsletter to illustrate how accurate our seasonal analysis can be for finding lows, though of course it works for highs as well.

Remember, seasonal analysis doesn't always work at predicting tops and bottoms (nothing does, even doctors make mistakes), but it does with enough regularity for many people to make money.

The method we use for getting into positions is to find a seasonal pattern that looks regular and predictable, and then put a trend following signal around that date. If the market breaks a trend line, crosses the MACD line or moving average right after a seasonal top or bottom, then we consider trading it.

Every month we scan for the patterns we like, put them on our Watch List, and then wait for a signal. If it doesn't happen, no sweat off our backs because we don't HAVE to trade any particular stock. There's always another opportunity, and another and another in waiting. The pressure is off to act. Just scan the newsletter, create your watch list and set-ups, and invest from there.

This particular video from our August newsletter shows how to pick tops too. So while it doesn't always work, we think it's a robust, logical approach to trading and investing. When you scan the newsletter and find patterns you want to trade, you have a month to do your due diligence on whether the stock has fundamental earnings strength behind it, whether the industry is strong, and so on. Before you invest in a stock using IBD, VectorVest, ValueLine, FusionIQ or some other rating system, check its seasonal price pattern. But check the correct pattern as we show here because money is at stake.

We always check our purchase (and sales) against the seasonals, and we calculate them in a way we believe is correct (the orange projection line) that others don't know about. In our case the best seasonal projection line changes every month as new price data comes in to bias the calculations, which is why it's more accurate than static seasonal analysis and can often dish out superior investment profits.