One of the things that I am asked most often, after I identify a potential group move, is how do I trade it.

The easy way out and most commonly touted approach is to simply buy the corresponding ETF as this provides the diversity of buying a basket of stocks and thus limits the potential risk of buying the wrong stock and watching it go down while the rest of its brethren continue to enjoy prosperity.

The purpose of this little series will to be to touch on some of what I teach in my one-on-one sessions to a common sense approach to buying when any group begins to move, whether it is gold, oil, pharmaceuticals etc. etc. irrespective of our knowledge of the individual stocks.

Most of us pick sentimental favorites when a group begins to move. We think back to that favorite Lilly trade we made when pharmaceuticals were hot and we try to convince ourselves that it will be good again...big mistake...Companies rise and fall on their near term performance...Ancient history IS NOT a gaurantee of continued success.

So ...we buy an ETF...the new hot flavor of the month. ETFs generally are composed of 18 to 30 stocks, so they do indeed provide a broad diversity. Therein lies the problem. You probably have 4 real winners, 6 real dogs and a bunch of mediocre stocks in the middle. We will get average mediocre returns because that is what we bought into to provide some level of risk prevention...

A much better idea would be to buy not the "best" stock in the group...but rather the top 3 stocks for the timeframe we are interested in so that we spread risk, but among the category killers in the group.

Ahhh...There's the rub...How do we find that "best 3 of the group"?

Let's take a current example of a group I have been watching for quite some time, anticipating a reasonable move up.

Here is the RKH which is the Regional Banks ETF...



Today's action made a new local high that I have been waiting for. For a whole bunch of reasons I believe the Regionals will be making a strong move over the next couple of months. If I am wrong I will establish stops as I will show you in a little while. We had a low volume (relative) breakout today, so it is quite possible that we will see some weakness again in the short term...

In this next shot I will show you the completed setup for a measured move continuation play.



Now the breakout today is no gaurantee that this trade will go straight up from here, but we have an established trading range and since we usually see reversals of FOMC meeting action the next day that should probably get us back into the channel preparatory for a new break to the upside shortly. Some, on a day like today would buy a small position, then add on any test or if the trade goes up by some nominal amount, ie. 3%.

The thing that this chart does provide is a setup for the action to come if the trade doesn't fail to the point where it drops through the bottom of the consolidation pattern.

Once the breakout is confirmed by subsequent action, we can take the length of the lead-in leg and add it to the lowest low of the consolidation to project the ultimate target zone. In this case up around $128.

Now the question becomes ...if we want to maximize our investment how do we choose the best of breed stocks to buy??

Here is where you start....

Go to Google and enter RKH(the name of the group), ETF (so it knows what we are talking about) and "Components" to search for those companies that make up the ETF.


Within the first 10 selections you will find some site that will actually give you a breakdown of the holdings.



The resultant web site gives us a breakdown of the 18 stocks making up this synthetic trading vehicle and the weighted values in this "holder.

what it doesn't tell us is how these stocks compare not only to the overall performance of the ETF but how they compare to each other...

That's the subject of tomorrow's lesson.....