The Bottom-Fishing Report

There are two profitable ways to trade or invest in this recovering market. First, we can play stocks that got beat up badly during the crash and hang on while they try to mount overhead supply. Second, we can find the handful of maverick issues that avoided the barrage of selling pressure and hope they continue their winning ways in 2009.

Each of these strategies carries unique reward and risk considerations in this early-January market. Today, I'll outline key dangers and opportunities in bottom-picking, listing top picks in that popular category. On Tuesday, I'll continue the discussion with a look at working strategies for stocks that are trading near their 52-week highs.

Bottom-picking the most popular stocks of the last bull market is quite seductive right now. But realistically, most traders and investors will lose money trying to buy last year's losers, even though equities look cheap after the biggest selloff in decades. Simply stated, the odds for a V-shaped recovery are slim in this post-leverage environment.

More likely, the major indices will carve out broad sideways patterns in the lower half of last year's massive trading range, with a broader recovery unfolding in the next two or three years. This long-term base-building process increases the risk you'll lose money in your knife-catching expeditions unless you apply aggressive profit-protection schemes.

In this regard, bottom-pickers should focus attention at the 50-day and 200-day moving averages. Many stocks have now rallied above 50-day levels and could move much higher, as long as inevitable testing at new support holds up. Alternatively, I believe all readers need to take profits without hesitation if this recovery hits resistance at the 200-day moving average.

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At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.

Farley is also the author of The Daily Swing Trade, a premium product that outlines his charts and analysis. Farley has also been featured in Barron's, SmartMoney, Tech Week, Active Trader, MoneyCentral, Technical Investor, Bridge Trader and Online Investor. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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