We’re often told to “Never buy a stock hitting a 52-week low.”
“Stocks in downtrends tend to stay in downtrends.”
“Any stock hitting a 52-week low will always be weak.”
Or, “nothing is more destructive to amateur investors than thinking that a stock trading near a 52-week low is a good buy.”
However, none of that is true.
Such lows can actually highlight opportunity, especially in larger-cap, optionable stocks.
As I’ve learned over the years the time to buy is “when blood is running in the streets… even if that blood is your own,” as pointed out by Baron Rothschild. I’ll admit it’s a hard maxim to follow. Your instinct is to follow the herd and sell. But know this – following the herd and ignoring a 52-week low can cost you opportunity.
The Technical Trick to Spot Excessive Fear
Believe it or not, fear can be uncovered using three key indicators including Bollinger Bands (2,20), relative strength (RSI) and Williams’ %R (W%R). That’s it.
Let’s use Apple Inc. (AAPL) for example.
In the latter part of 2018, Apple plummeted from $230 to around $140 on fears of slowing growth and troubling trade war fears. However, the fear got way out of hand here. And we knew that from our three technical indicators – all of which aligned in oversold territory.
Notice what happened at $140 a share.
Not only was Apple at its lower Bollinger Band, but RSI was below its 30-line and Williams’ %R was below its 80-line. Even MACD has pushed too far south. All were pointing to excessively oversold conditions.
And just in case you think it’s a fluke, take a look at the history of Apple and these three indicators on the chart. Each time they align, the stock pops and recovers.
When it happens, all you have to do is buy the stock, or a call option for. Example, and wait.
The beauty of this is that it produces wins up to 85% of the time.
It’s spotting excessive fear, as dictated by the psychology of herd mentality with great success.