by Nathan W » Wed Feb 17, 2010 6:47 am
What I do is use Google finance to create a chart of the Dow and a stock on the same chart. This eliminates the fluctuations of the market overall, and makes it easier to see where a stock is in relation to the overall market. I view these charts on a 1 day, 5 days, and 1 month basis. Some stocks such as XOM tend to come back up or down to where they started in relation to the overall market. Right now, XOM is down 3% from the market, relative to where they both started a month ago. From 5 days ago, it's down 2% vs market. From 1 day ago, it's also down 2% relative to the market. So on a 1day, 5day, and 30 day basis, this stock is undervalued and historically always rises to catch up to the market when undervalued relative to the market.
Using this strategy, now would be a good time to buy XOM stock.This strategy can be applied to other stocks as well, and in reverse when shorting a stock.
Another twist on this strategy is to buy one stock below market (on a 1day, 5day, and 30 day basis) and short another stock which is above market using the same criteria. This protects against losses from swings in the overall market.
At the moment, I'm still learning my own strategies, and do trading on virtual trading sites. If it keeps working, I'll consider investing real money.