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The Best Time To Buy Momentum Stocks at Trader’s Narrative




The Best Time To Buy Momentum Stocks


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Last summer I pontificated about the future of Apple Inc. (AAPL) wondering if it was time to sell:

All the smart and “hot” money has been trading it and riding it higher. And you can bet they will run for the exit at the first sign that the party is over. Which is why I watch Apple so closely. I’m seeing a confluence of things which gives me reason to believe that the ride may be over.

So how did I do?

Well, Apple thoroughly spanked me. The only tattered consolation I can cling to is after writing that, the rocket ride known as Apple paused for the rest of the month of June. The only thing that knocked it out of the sky was the general market tumble in mid July. It found footing where it had paused earlier and off it went again when the market recovered.

I’m bringing this up for two reasons. One to review a past call and award myself a meager C- and two, to talk about entry into momentum stocks. Most technical traders agree that momentum stocks provide a great opportunity. As the saying goes, “the trend is your best friend”. Or, bodies in motion tend to stay in motion.

aapl Apple 2008 recovery

This is especially true when the market has corrected and is about to find its footing again. It is a very rare momentum stock indeed that can completely buck the general market tone. Apple certainly didn’t and it was one of the best performers in 2007.

The general market is like the tide or the waves of the ocean. It is a background element common to all boats (stocks). But some boats have better hulls and more hydrodynamic shapes. So they will react differently to the same common element.

Apple carved out a rounded bottom at $120/share, just as the S&P 500 found its footing. For AAPL that level also coincides with previous important points of support. From there it launched into an astounding recovery which left other stocks in the dust. While it has now easily reached the heights it once claimed in late 2007, the S&P 500 is still more than 8% below its highs of October 2007.

Although most would agree that it is smart to ride the momentum of stock like Apple, but can’t agree when exactly they should enter it. I would suggest that the best time is when the market has exhausted itself within a correction and is about to bounce back. This allows you to define your risk and base it on support levels, removing guesswork.

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5 Responses to “The Best Time To Buy Momentum Stocks”  

  1. 1 dd

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    indeed the hull is strong on this one, of light-weight, futuristic design, some may claim unsinkable (in nearly all known seas)

  2. 2 Hardhead

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    One should look back and ask why did Apple drop from $200 to $120 - simply PANIC! Investors realized their mistake and now Apple is headed back where it should be and remain - above $200. Apple “still” has room to grow with more news to be released soon. $300 by Jan 09 is very possible.

    HH

  3. 3 wonton

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    I think there will be a nice pullback. The overall market has just been on a upward trend, Apple tends to follow suit. When the market finishes it’s climb, Apple will pullback even with all they phone hype. Oil is astronomical, food prices are thru the roof and people are foreclosing there homes everywhere. I think that would have to have some affect of people walking and blowing big money on Apple products. I also see that the Apple stores and the big malls are much more quieter than last year.

  4. 4 Hardhead

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    wonton saz - I also see that the Apple stores and the big malls are much more quieter than last year.

    I have no idea where you have been visiting the Apple store where sales and visits have excelled well beyond expectations. Apple is HOT and has more FLAME for the iShorts. http://www.ifoapplestore.com/stores/charts_graphs.html

    As for the malls I know there is one on every corner like stock analyst.

    HH

  5. 5 YK Investments

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    Wow, I’d have to say big mistake on your part myself. AAPL always does this year in and year out for the past 2-3 years. They report poor guidance during Q4 call, and drop in January. You wait for the shares to level at $120-$130, and your buy is when AAPL breaks $135. I bought AAPL Oct. 155 calls for $1365 per contract. This was back in late March, and sold them of today (May 14, 2008) for $4250 per contract. That’s the power of momentum, but my advice is you should know the stock’s behavior first. Trade momentum on stocks you are fimaliar with. Good luck.

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