Stocks Ripe for Some Bottom-Fishing

This column was originally published on RealMoney on May 14 at 12 p.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

It's been a great market if you're holding big-caps, industrial metals or the handful of story stocks trading at new highs, such as Apple (AAPL - commentary - Cramer's Take) or Amazon (AMZN - commentary - Cramer's Take).

But it's been a frustrating market if you're overexposed to small-caps, tech stocks or other speculative groups that require a strongly bullish tape to underpin their rallies.

Daytrading has also been a fantastic way to make money this spring, as abrupt reversals yield all sorts of quick profit opportunities. Add in the dozens of great trades in the energy sector, and no one can deny the resiliency of the 2007 uptrend.

But I suspect the easy money in the current bull wave is just about gone.

In its place, look for more downdrafts like Thursday's stomach-wrenching somersault and more selling pressure on attempts to lift the indices to new multiyear highs. In other words, I believe we're headed into a more typical sell-in-May environment, with the increased threat of an intermediate topping pattern.

If so, now's a good time to dust off a classic strategy that's been out of vogue in this hot spring market. It's called bottom-fishing. While most folks are still throwing money at stocks near new highs, beaten-down issues could serve up the most enticing reward-to-risk trades between now and Labor Day.

Unfortunately, most traders are lousy bottom-pickers because they fail to utilize a filtering methodology that limits their risk to real turnaround candidates. Instead, they treat these stocks like lottery tickets, not comprehending that downtrends can last for years and drop prices well below obvious turning points.

---

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

Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback; click here to send him an email. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.