4 Steps to Mastering Momentum Stocks - Investment Ideas

"Because that's where the money is."

So when investors ask me why I prefer momentum stocks, I can't help thinking about this same quote. To me, it's obvious and I strongly believe that everyone should follow suit. That's because momentum stocks are the high fliers in every market environment. They offer the highest reward in the shortest amount of time.

The goal of this article is equally as simple. I want to show you the 4 steps in finding the best momentum stocks so you can enjoy the rewards in the months and years ahead.

Step 1: Screening

It begins with an initial screening process to help me find stocks to put on my radar. I look for Zacks Rank #1 (Strong Buy) and Zacks Rank #2 (Buy) stocks that:

• Have recently surprised earnings to the upside
• Have had earnings revisions to the upside in the last month
• Have outperformed the market
• Are within 15% of their 52 week highs

This helps me dwindle down the stock universe to about 40 high quality names with great earnings stories and fantastic price momentum. Then I can laser focus in on stocks with the highest likelihood of short term performance, deeply rooted in the proven Zacks Rank methodology.

More . . .

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There are 5 momentum stocks with extreme gain potential on our radar, but time is short to get aboard. Too many early investors could spoil the fun. Your opportunity ends Sunday, April 27.

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Step 2: Trend

From the 40 or so potential investment ideas generated from the screen, I check to see which stocks are in an uptrend. There are many ways to do this and I could make this as complex as I'd like. However, in my experience the simplest approach is the best.

I use the 25 day simple moving average shifted to the right by 5 days and compare price to the average. If the stock is above the average then it's in an uptrend. I'm not looking for turnaround stories or stocks that are value plays, I'm looking for momentum stocks. I only buy stocks in an uptrend.

Step 3: Trace

Chart by chart, I look for areas of support and resistance. I find historical price levels where the stock has been bid and areas where a rally died out when buyers shied away.

If the stock has had a long run, I use Fibonacci retracement levels at 23.6%, 38.2% and 50% of the move in order to find potential support for a sell-off in the future. I look for stocks that are closest to their support levels and farthest from resistance.

This gives me a great risk versus reward scenario. I always look for stocks that have at least a 2:1 risk versus reward ratio in order to give me a mathematical edge over time. Just like the house has the edge in the casino. I want to be the house.

Step 4: Trigger

The last step is the most important. After identifying the quality names that are in uptrends and have a great risk versus reward ratio, I then need to figure out when to buy. For this I use an indicator known as the stochastic (%K 14, %D 7, Smooth 3) for my trigger.

The stochastic indicator is great because it tells me whether a stock is overbought or oversold and it tells me when the stock is at a turning point. It's very clear cut in black and white and leaves the guesswork out of my decision making.

By now, you should already know the power of earnings revisions and the Zacks Rank. Now I'll show you exactly when to buy top ranked stocks for the most money-making potential.

What You Can Do Today

You are invited to see these momentum powerhouses by becoming a Charter Member of a new service I'm directing, the Zacks Momentum Trader.

Right now, the first 5 momentum stocks are appearing on our highly selective radar and I'm getting ready to pull the trigger. Each of these strong, hand-picked companies had surged to a 52-week high then pulled back slightly when investors took their profits too soon. It's time to get aboard because the real fun is about to begin.

In fact, until Sunday, you can arrange to receive my momentum recommendations and commentary – plus all of Zacks' other private buys and sells – for one month at a total cost of only $1. (That's almost like robbing a bank.)

I must stress, however, that this will be a "closed portfolio." Access will end this Sunday, April 27 because too many investors would make it harder for our members to fully profit. I suggest you look into this new service right away.

See our first Momentum Trader buys >>

Good Investing,

David

David Bartosiak is Zacks'resident technical and momentum expert. He selects stocks and delivers daily commentary for our newly launched Zacks Momentum Trader.

 
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