Technical/Quant Guidelines For Buying Stocks & ETFs (Brief)


Summary

Buying a stock or ETF is not just a matter of wanting to own it, it’s a matter of buying it with the lowest cost possible.

Scaling in is mandatory, don’t try to buy your whole potential position all at once.

Use some basic technical and quantitative indicators to help you find spots that are more likely near intermediate term price bottoms.

We buy investments using a 4-step process: 

  • Identify and analyze long-term secular and macro trends.
  • Consider the sizable impact that activist governments and central banks can have on your investments.
  • Do a deep dive on the fundamentals of a company or ETF and identify whether or not the assets is likely to provide at least a double in total return within 5 years.
  • Use technical and quantitative indicators to find good entry point price ranges for scaling in over 2 or 3 months (in most cases). 

This piece will focus on the technical and quantitative aspects of investing. This is a very brief piece. It should lead you to some questions that you can use to visit other more comprehensive learning sites. Among the sites to visit are: 

As you can see, I place a premium on the ideas of Marc Chaikin (his is one of three dozen services that I subscribe to – which gives me the opportunity to share with you the best ideas I find not only from my research, but the research of others). I like Chaikin because his ideas can be used both in predictive and reactive strategies.

What are predictive and reactive strategies?

A predictive strategy means that you are trying to predict the coming moves in an asset price. In the short-term (under a year) this is very difficult to nearly impossible. Prediction is what frustrates many investors because they might legitimately have found a great investment, but the price moves against them short-term. 

Reactive strategies, also called trend following, wait for a trend to be in place on an asset before jumping in. This idea goes back to Richard Dennis and the Turtle Traders, one of whom is legendary tribe leader Ed Seykota.

The problem with pure trend following, especially today with so many who try it, is that the earliest big price moves in an asset are often the largest, thus, trend followers often get in late when the asset is already getting expensive, thus raising risk for corrections. 

The ideal trading strategy would use predictive analysis to prepare us to react to a new trend as early as possible or as near a pivot point as possible giving us consistently low buying prices. 

By using some basic technical and quantitative indicators, we can try to blend the best of both predictive and reactive investment strategy. The most important part of predictive strategy is getting steps 1, 2 and 3 right in our 4 step process because that will put the intermediate and long-term on your side.

The final step, using technical and quantitative analysis is to help you enter (or exit) a position in the short-term with a low cost basis. We should remember, the lowest cost basis wins the most.

Very Basic Guidelines

Once you have determined that a company, sector or nation has a positive 5-year outlook, then you need some guidelines for buying your target investment. Here are three basic steps to finding advantageous entries: 

1) Look for major support levels that are likely to be held and rebounded from.

2) Relative Strength Index: Look for stocks trading in the 30s or 40s with a rising trendline. 

3) Mind the moving averages. Avoid situations where multiple short-term simple moving averages have been broken through AND long-term exponential moving averages are being threatened. This article has a discussion:

Adjusting To Market Breakdowns

4) Look for the Chaikin Money Flow to be crossing from negative to positive. Observe both standard 20 part period on both the daily and weekly charts. Sometimes, the 20-day CMF is moving to positive, but the 20-week is moving negative. Caution is warranted in those situations as it indicates a potential bearish trend is developing. 

An example of a stock I would buy:

GOOG Buy

Notice that the first buy and second buy are over two weeks apart. Scaling in is a process that takes some time, generally a month or two or three – not a few days.

The reason I buy some now and then sell a cash-secured put for a month or two out is to diversify my buys. If the price rises from first buy, then I simply collect premium. If price falls from first buy, then I accumulate more at a lower cost basis, lowering overall cost basis. 

This are just some basic guidelines. As you read and learn, you’ll become better and better at entries. I hope this helped.

Disclosure: I am/we are long GOOG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.