Take Advantage of the Low Risk Zone

Over time, every stock displays unique patterns of establishing an uptrend, staying in that trend for a period of time, weakening, and ultimately moving lower. The TradeStops Stock State Indicators are described by TradeSmith as “the life cycle of stocks” or a life cycle of a trade.

We use these icons and symbols in TradeStops to document this life cycle.

Of the five Stock State Indicator conditions, three occur when a stock enters the Low Risk Zone. Let’s look at these more closely.

Two conditions must hold true for a stock to trigger its SSI Entry signal trigger.

1. The stock must be at least one VQ% above its most recent low and,

2. The SSI Trend must be in an uptrend.

Here’s a recent example of a stock that has just initiated a new SSI Entry signal.

The SSI Entry signals are powerful algorithms that identify when a stock has moved into an uptrend that is likely to last a long time. The signals are conservative in that they require these two separate triggers to occur simultaneously.

But we all know that stocks don’t move straight up or straight down. They move up and down on a daily basis. This is called “noise” in the market. The TradeStops system seeks to eliminate noise in the market and focus on identifying when an uptrend begins and when all that noise causes the trend to be broken.

One area of this day-to-day noise represents a very good opportunity for sophisticated investors. We call this the Low Risk Zone.

The Low Risk Zone identifies a stock that has triggered the SSI Entry signal, but has dropped a little over 50% from its most recent high.

Microsoft (MSFT) is a great example of this.

MSFT originally triggered an SSI Entry signal on 10/30/2015. Since that signal was given, it has dropped into the Low Risk Zone six times and then bounced back above. The last bounce that occurred at the end of the two-day Brexit move lower has propelled the stock close to an all-time high.

Why is the Low Risk Zone such a powerful tool?

When a stock is in the Low Risk Zone, it has moved down from its near-term high, but it is still a stock that triggered a powerful SSI Entry signal in the recent past. Buying a stock that has entered the Low Risk Zone means that you’re taking less than half the normal risk in the stock.

Here’s another great example of a stock that hit the Low Risk Zone and has nicely bounced back higher.

Flir Systems (FLIR) triggered an SSI Entry signal on 2/16/2016 and moved higher into the end of April. Since that time, the stock has moved into the Low Risk Zone three times. As with MSFT, this last move lower has been the catalyst to catapult the stock close to its recent short-term high.

Yes, you can get stopped out of the trade if you wait to invest until the stock hits its Low Risk Zone, but you’ll know that you’ve taken much less risk than if you got into the stock earlier. If the stock does continue to move higher, you have even more of an opportunity to take advantage of outsized gains.

The SSI Low Risk Zone has three separate signals. The signals are differentiated by the slope of the SSI Trend. The trend can be moving higher, can be flat, or can be moving lower. This can be important to help you consider avoiding a stock that is in the Low Risk Zone, but has a trend that is moving lower.

The Stock State Indicators are available to TradeStops members with a Plus, Premium, and Lifetime level of service.

Tom Meyer
Member Services