As a part of financial planning and retirement planning, we do invest in stocks directly as per various pieces of advice from neighbours, co-worker, financial advisors and planners. More often, we really a get a kick in picking out stocks and brag about among friends and investor circles.
There is a systematic way to do the same process of picking out good stocks for investment from out of a milieu of stocks, with a simple lay man understanding of technical analysis.
Step 1. Pick only liquid and well followed stocks fair amount of volume of capitalization. We shall select CNX 100 stocks from NSE. Listed and indexed stocks are well followed, monitored and reviewed by investor populace. This naturally is the first filter
Step 2. As I have already discussed methods to identify trending stocks above and below 200 MA
in our previous blog titled Top 10 Equity Stocks for Short and Medium Term Investing or Trading.
We would apply similar filter to identify Up-trending stocks and Down-trending stocks by applying the filter if the stocks trade above or below 200 Day Moving Average (DMA) getting from Yahoo and other sources.
Step 3: Very strong uptrend and very weak downtrend can be identified if a stock is above both 50 DMA and 200 DMA.
Step 4: Relative strength indicator (RSI) or Stochastics indicator are used to measure whether stocks are trading in the bottom or top of price bands cycle. Generally RSI above 70 or Stochastics above 80 indicate over-bought levels and RSI below 30 or Stochastics below 20 represent over-sold levels.
We would prefer stocks which are not over-bought in up trend and sell or short stocks which are not over-sold in down trend.
All the sheets of the filtering stocks from CNX 100 list work-book can be viewed here. The sheets are supposed to auto update. You may watch regularly by book marking the same. The last column link can take you to respective Yahoo chart for verification of the individual stocks and how they look and to see other parameters.
Note: This article is for Educational and illustrative purpose only as movement in stock prices cannot be predicted and subject individual risks of the Company, market risks and other risks
These steps are best let out to professionals and we advocate friends to use Mutual funds for investment for building retirement and financial planning corpus.