4 Steps to Mastering Momentum Stocks

Legend has it that the notorious gangster Willie Sutton was once asked why he robbed banks. His answer was seemingly obvious, yet remarkably poignant:

"Because that's where the money is."

So when investors ask me why I prefer momentum stocks, I can't help thinking about this same quote. To me, it's obvious and I strongly believe that everyone should follow suit. That's because momentum stocks are the high fliers in every market environment. They offer the highest reward in the shortest amount of time.

The goal of this article is equally as simple. I want to show you the 4 steps in finding the best momentum stocks so you can enjoy the rewards in the months and years ahead.

Step 1: Screening

It begins with an initial screening process to help me find stocks to put on my radar. I look for Zacks Rank #1 (Strong Buy) and Zacks Rank #2 (Buy) stocks that:

• Have recently surprised earnings to the upside
• Have had earnings revisions to the upside in the last month
• Have outperformed the market
• Are within earshot of their 52 week highs

This helps me dwindle down the stock universe to about 40 high quality names with great earnings stories and fantastic price momentum. Then I can laser focus in on stocks with the highest likelihood of short term performance, deeply rooted in the proven Zacks Rank methodology.

MORE . . .

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Step 2: Trend

From the 40 or so potential investment ideas generated from the screen, I check to see which stocks are in an uptrend. There are many ways to do this and I could make this as complex as I'd like. However, in my experience the simplest approach is the best.

I choose an intermediate term moving average and compare price to the average. If the stock is above the average then it's in an uptrend. I'm not looking for turnaround stories or stocks that are value plays, I'm looking for momentum stocks. I only buy stocks in an uptrend.

Step 3: Trace

Chart by chart, I look for areas of support and resistance. I find historical price levels where the stock has been bid and areas where a rally died out when buyers shied away.

If the stock has had a long run, I use retracement percentages of the move in order to find potential support for a sell-off in the future. I look for stocks that are closest to their support levels and farthest from resistance.

This gives me a great risk versus reward scenario. I always look for stocks that have at least a 2:1 risk versus reward ratio in order to give me a mathematical edge over time. Just like the house has the edge in the casino. I want to be the house.

Step 4: Trigger

The last step is the most important. After identifying the quality names that are in uptrends that have a great risk versus reward ratio, I then need to figure out when to buy. For this I use a short term indicator known as the fast stochastics as my trigger.

The stochastic indicator is great because it tells me whether a stock is overbought or oversold and it tells me when the stock is at a turning point. It's very clear cut in black and white and leaves the guesswork out of my decision making.

By now, you should already know the power of earnings revisions and the Zacks Rank. Now I'll show you exactly when to buy top ranked stocks for the most money making potential.

What You Can Do Today

You're invited to see some stocks with exceptional upside in a portfolio service I'm directing, Zacks' Momentum Trader.

In this service, we dig beneath the surface to discover the underlying cause of the price action we see on the charts. By combining the predictive power of the Zacks Rank with an extra layer of technical analysis, we're targeting the most explosive stocks on the market.

With this week's market upturn providing more momentum stocks, I can help you find the very best ones to get into right now.

Our highly-selective radar has locked onto 8 such tickers and I'll be adding a 9th pick on Tuesday morning.

You can also download our newly-updated Special Report, 7 Best Stocks for the Next 30 Days absolutely free. This report lists seven high-flying stocks handpicked from our Strong Buys list that has nearly tripled the market.

The Special Report is free until midnight Saturday, May 28.

See Momentum Trader Buys now >>

Good Investing,

David

David Bartosiak is Zacks' resident technical and momentum expert. He selects stocks and delivers daily commentary for our Momentum Trader.

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