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A Simple System to Identify Winning Stocks in Volatile Markets

·3 min read

The stock market can seem complicated and confusing at times, even to seasoned investors. Individual stocks can move up or down seemingly without reason. Your favorite company reports terrible earnings but the stock surges. The price of oil drops and economic data comes in better-than-expected, but the major indices nosedive. While today’s price action certainly makes sense given a higher inflation reading than anticipated, things aren’t always as clear. Often, the market’s reaction to the news is much more important than the news itself.

In life and the stock market, we don’t necessarily need to know why something is happening – we just need to know that it’s happening. Financials analysts are paid to decipher company fundamentals in an effort to produce buy and sell ratings on stocks. But how many times have you seen a stock with poor fundamentals soar, while one with superb fundamentals plunges?

For the average investor, following a system rather than relying on predictions is going to produce much more favorable results over time. We don’t necessarily need to know exactly why a stock is moving in a certain direction, we just need to know which way it’s most likely to go.

Let’s take a look at a simple example. We want to target stocks whose buying pressure is exceeding any selling pressure, and avoid stocks that are experiencing heavy selling. Moving averages are a great way to ‘smooth’ out the price trend for a given stock. In our example, we’ll stick with the simple 50-day moving average as our guide in conjunction with the Zacks Rank system, which harnesses the power of positive earnings estimate revisions.

Below we see a yearly chart of Meta Platforms META, a Zacks Rank #4 (Sell). Notice how META is in a downtrend and the 50-day moving average (blue line) has steadily been dropping. 2022 hasn’t been particularly kind to META, and we can see by the 50-day moving average that the bottom does not appear to be in, as the moving average has acted as resistance throughout much of the downward move.

StockCharts
StockCharts


Image Source: StockCharts

META stock has been making a series of 52-week lows and is experiencing negative earnings estimate revisions. META has fallen more than 55% in the past year. Analysts are in agreement and have been slashing estimates across the board.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Now let’s examine a stock whose buying pressure is exceeding its selling pressure. Below we can see a yearly chart of Lantheus Holdings LNTH, a Zacks Rank #1 (Strong Buy). Notice how LNTH is in an uptrend and the 50-day moving average has been steadily increasing. 2022 has been kind to LNTH, and we can see that the moving average has acted as support throughout much of the upward move.

StockCharts
StockCharts


Image Source: StockCharts

The 50-day moving average is sloping up and LNTH is making a series of 52-week highs. The stock has risen over 230% in the past year. LNTH is also witnessing positive earnings estimate revisions. Analysts are in agreement and have raised estimates across the board.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

We can see the power behind following a system and how it can help us both locate winning stocks and avoid losing ones. The next time you want to buy a stock, make sure to use the Zacks Rank to ensure the company is witnessing positive earnings estimate revisions. Incorporating simple technical analysis using moving averages is another great way to narrow down the playing field.


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Lantheus Holdings, Inc. (LNTH) : Free Stock Analysis Report
 
Meta Platforms, Inc. (META) : Free Stock Analysis Report
 
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Zacks Investment Research