The market's current slide may have many opportunistic traders and investors licking their chops on buying oversold stocks. But they would be wise to exercise patience and discipline to avoid catching falling knives. In equities.com's latest interview with Toni Turner of TrendStar Trading Group, we discuss identifying tradable bottoms as oil's fall could potentially threaten the overall market's uptrend.
EQ: Oil’s fall has been quite alarming and it’s still probing into lower territories. Are there any signs of a bottom anytime soon?
Turner: I believe that as far as the actual bottom for this run down, I can’t pinpoint it any more than anybody else. If I had to guess—and it is a guess—by looking at the chart of oil futures and the USO, which follows an index of oil prices, I would say that we’ll probably get an oversold bounce here pretty soon.
It will take finesse and experience to trade this “tradable bottom.” The last time the USO was this low was back in February 2009. Then it was trading at $22.74. As we speak, it’s trading around $22. So it’s obviously oversold, and I see a lot of volume coming into it for the last two to three weeks. That’s a good sign for at least a tradable bottom.
EQ: If oil doesn’t find a bottom here, what are some groups that would be appealing?
Turner: If oil keeps falling here, I believe even some of the strong sectors, like technology, may start to weaken a little more. But what I am looking at right now, and I don’t know if it’s going to hold a bottom here, and it’s one we haven’t mentioned in a long time, is the PowerShares DB Agriculture ETF (DBA). It’s testing prior lows from September and is right around $25.23. I don’t see huge volume coming into it, but then again, it never has huge volume. I’m just going to watch it here, and not necessarily buy it.
However, if I see volume coming into it, I may become more interested if it stays above $25. Another space that’s a lot more obvious is the SPDR S&P Retail ETF (XRT) and selected companies in that ETF. It fell in the last two weeks on worries about the market. But now with oil prices falling and consumer confidence rising, it may be good for another move up. However, it may just be a short term trade.
EQ: The reasoning for that being that lower oil and gas prices would translate to more money for consumers to spend, which would benefit retailers.
Turner: That’s correct. It absolutely would unless oil keeps moving down and it gets so overdone that the worries about a shrinking global economy take over.
EQ: The overall market is experiencing a dip at the moment from the recent all-time high. You recently held a webinar discussing bottom-fishing strategies. What are some characteristics that you look for when spotting these types of opportunities?
Turner: We look for our stocks and ETFs—and, by the way most of the oil-related ETFs fall into this category--that have fallen 20-35% from recent highs. We look for volume coming into the stock or ETF for at least two-to-three weeks. I know it’s hard to watch something for that long, but you have to be a very patient person to bottom-fish successfully and not jump in early. I know a lot of people want to jump into oil stocks right here, and some of those people have been cut by the falling knife so far.
But those are two things that we look for, and we look for basing patterns that indicate the stock or ETF has leveled off and is getting new buyers, making it ready to reverse higher again.
EQ: Bottom-fishing can be a rewarding strategy if done correctly, but you can also get burned if you don’t do it the right way. Where can people learn more about the proper techniques on doing this?
Turner: I’ve been work with Weiss Educational Services to help teach traders and investors on how they can bottom fish like a pro. They can learn more about it here.
EQ: Are there any other sectors or industry groups that you’re watching right now?
Turner: One group that nobody has really talked about is the PowerShares Dynamic Leisure & Entertainment ETF (PEJ). It’s certainly not a bottom-fishing candidate, but it basically has traded sideways since the summer of this year. It then dipped down in October with the broad market, and then rebounded. It’s been quietly moving higher here. Its prior high was almost $36 back in March, and now it’s trading around $35. I’m interested to see if it can break out here, and we can see if the low oil prices will benefit it also because people would have more money to spend on leisure and entertainment.
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