Every week I update my market sector trend chart. Here it is:

The Technology sector and the Utility sector are doing quite well — more than 75% of all stock prices in these sectors are trending up.

Sectors that are doing less well are Staples (food and basic retail) and Energy (means, oil & gas companies).

The yellow areas indicate uncertainty in price move direction (i.e. no definite trend).

So what?

Imagine you would randomly choose a company to buy stocks from… I know, that sounds a bit crazy. But hear me out!

Assuming that trends tend to continue, randomly choosing a company in the technology sector would result in a winning trade for 3 out of 4 trades. Those are pretty good odds!

Will that always work?

No.

In any case, it’s a 75% chance, not 100%!

And trends do reverse at some point. It’s just extremely difficult to predict when that will or might happen. Existing trends have a strong momentum and reversals take time to materialize (with very few exceptions).

Can I improve my odds further?

Yes.

By using additional information about that company. We will look at one such case next.

A case study: Xerox Corp. (XRX)

You probably heard about Xerox. If not, check out your office copy and printing machines — chances are that some are from Xerox. It’s a technology company (remember, 75% success rate!).

It’s an “old” company — founded in 1906! And they became a large corporation primarily through their key invention: the photocopy machine. But I will not dwell in their business fundamentals here — instead, I will look at their historical pricing.

How have they been doing compared to the rest of the tech sector?

Answer: not that great.

In fact, their overall trend is still downwards. The gray, thicker line is the sector average.

But there are signs of recovery. In the last 6 months, their stock price has greatly improved and is now growing faster than the sector average. And there was a trend reversal indicator, too: a cross-over of long-term and short-term trend lines.

The long-term trend line is not going upwards, yet — so by definition, XRX is not trending up for now. And there were “fake” reversal signals before — it certainly can happen again.

For opportunistic buyers: set your stop price far enough from the buy price.

Here’s an example trade:

With an (example) portfolio value of $50,000:

• Limit the risk to 1% of portfolio value: $500 max. loss
• Buy price: $33.13 (as of 24-Sep-2017)
• Stop Price: $29.00 (that’s more than 10% below buy price)
• # of stocks: $500 / ($33.13 — $29.00) = 121

Buy (Limit) and Stop Orders:

• BUY LIM 121 @ 33.13 GTC
• SELL STOP 121 @ 29 GTC
• or trailing stop: SELL TrSTP 121 @ 4.13 GTC

Remember to adjust these numbers to your portfolio value!

Happy trading!