Wednesdays with Wyckoff: How I Select a Stock for Investing

Jun 15, 2011: 8:27 AM CST

Switching gears for this week’s “Wednesdays with Wyckoff” series, Richard Wyckoff not only contributed insights into the trading community, but also the broader investing world.

This week’s update focuses on Wyckoff’s Six Factors he used for selecting a stock to buy as an investment, and they are as follows:

1.  The Longer Term Trend of the Stock Market

2.  The Nature and Tendency of the Industry of a Stock

3.  The Trend of the Selected Company’s Affairs (improving)

4.  Character and Reputation of the Management

5.  Financial Position and Earning Power

6.  Position Relative to the Intermediate Trend (30 and 60 day swings)

Concluding:

“When all of the above prove up to my satisfaction, I feel safe in making an investment.”

Wyckoff seemed to place equal focus on the fundamentals (earnings, growth, management) of a company as he did the stock chart (rising trend) along with that of the sector (also rising) and broader stock market trend (rising).

In other words, Wyckoff sought to buy strong earnings companies that are in respective uptrends in harmony with the broader rising stock market.

Wyckoff further stresses the importance of the trend of the stock market:

“Practically everyone agrees, and I have proved in another series of articles, how vitally important it is to know the long-term trend of the market.”

“This is the compass by which all courses should be steered.  It is one of the main points in successful investment.”

“Even poor or weak stocks advance to some extent in a bull market.”

Here is an example of what Wyckoff means, as seen since 1997 to present in terms of shifts in the Major or Primary Trend:

Starting with the big run up into the 2000 peak, we’ve seen four reversals in the Primary Trend.  Primary Trends tend to last longer to the upside (bull market) and are often quicker on the downside (bear market).

Primary Trends tend to continue from 3 to 5 years.  The difficultly for investors is not just  calling the turn after it is confirmed (never at the highs or lows), but staying with the trend by fighting of doubts of “Ohh, this trend is over.  It just can’t continue.”

Beyond the general trend of the stock market, Wyckoff emphasizes the trend of the industry or what we know today as the sector.  This is the logic of the frequent “Sector Rotation” updates I show from time to time on the blog.

From there, he suggested finding the strongest comparative stocks within strong sectors in a rising market – a very good strategy for likely success in the investment world.

Whether we know it or not, a lot of the wisdom of the markets we know today came from writings of Richard Wyckoff!

Stay tuned each Wednesday as we go over a new concept or teaching from Wyckoff as we apply it to today’s markets.

See the prior two “Wednesdays with Wyckoff” updates:

“Trading a Stock Breaking Through Resistance”

“Trading in Dull Markets and Breakouts”

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

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  1. Wednesdays with Wyckoff: Mental Poise and Calm | Afraid to Trade.com Blog Says:

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