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Dykstra: Buy In at the Floor

Lenny Dykstra

Just when we think stocks can't go lower, they do. Investors are all waiting for the floor -- or market bottom -- before jumping back in. Yet, this week we've seen stocks lose ground yet again.

Many industrials have been hit hard this week. Caterpillar(CAT), which has won for me twice last year, bottomed Wednesday at $24.36, a multi-year low. Its competitor Deere(DE), which was my pick for Wednesday, also fell.

And pharmaceutical stocks Pfizer(PFE) and Novartis(NVS) tumbled this week, hitting at least five-year lows. Even Cisco(CSCO) is close to testing its one-year low of $14.20, set in November. When stocks get hammered this badly, they present a buying opportunity for my deep-in-the-money call options trading system, which has a win record of 95-1. What we should do when stocks hit their historical lows raises a technical-analysis question posed by a reader.

Can you explain support levels?

When you make any investment, it is important to buy on weakness or support, then sell on strength or resistance. Support is defined as the price level a stock typically will not break through on the way down. Resistance is the peak a stock will rise to, hitting investor resistance to go any higher.

Last fall, many stocks broke through their support levels. Now, with many stocks again trading at or near their 52-week lows, support levels are being challenged on a daily basis. Stocks such as General Electric(GE) and RadioShack(RSH) have broken through their support levels this week.

When GE plummeted Tuesday, the stock revisited prices (on a split-adjusted basis) it hasn't touched in over a decade. When a stock breaks through support, we look for the next level, which is calculated on a longer average or a multi-year low.

We also look for institutional support, which comes from the percentage of outstanding shares owned by institutions. A higher percentage of shares owned by institutions means increased stability for the stock price and a greater chance the stock won't break through its support level.

Stocks all trading at or near basement levels is a buying opportunity. We should be willing to get in while other investors are running for the hills. Remember to buy low. However, my DITM options system is not a buy-and-hold strategy. We take the first bounce that will line our pockets with our targeted profits. We cash out, and we don't look back.

Lenny "Nails" Dykstra, a guy who's used to winning, consistently profits from his deep-in-the-money options calls. You can, too, with his Nails on the Numbers. Try Lenny's service free and see how it works for you. If you decide to subscribe, just one winning call will pay for a whole year!