TechMeister Finds Trades in Volatility

Reactions to this week's earnings results were volatile, as I discussed Thursday. Smart investors will evaluate these reactions so they can make better investment and trading decisions overall. I'll show you how this works for big-name tech stocks Apple(AAPL), eBay(EBAY), Google(GOOG) and Yahoo!(YHOO).

It's a tough discipline, but to improve your success, learn how to buy on pullbacks and sell into strength. This way, you can use market volatility to benefit from shorter-term trading opportunities, while maintaining core holdings in technology companies you have chosen for the longer term.

Why and How

I developed my stock valuation models with an eye to do exactly that. When a stock declines, it becomes less overvalued or more undervalued, which makes its fundamental screens even more important. When a stock rallies, its weekly chart profile outweighs the fundamentals. Paying close attention to the weekly chart profile can help you decide to stay long until you see a signal to book profits. A weekly close below the stock's five-week modified moving average would be one such signal. Entry and exit levels, which I call value levels (buy) and risky levels (sell), can be used to trade around core portfolio holdings.

Learning to trade around a core holding should help you outperform by capturing bigger gains as stocks trade back and forth between value and risky levels while they make longer-term moves higher. Investors need to shift away from the "buy and hold" strategy that worked for 20 years, because it hasn't worked as well over the past six years. By having an exit strategy and the discipline to trade with shorter-term horizons, you can minimize the pits of the 2000-02 market demise. The strategy in the new millennium is "buy and trade." The key discipline for executing this strategy successfully is reducing the emotions that can adversely affect investment and trading decisions. Again, I developed my models to help do exactly that, a process I describe at the end of this column.

Applying the System

For example, according to my model, Apple was 77.0% overvalued when it traded at $44.50 at the beginning of March. That was a clear warning that shares were vulnerable in the event of a negative reaction to earnings. In April and May, with shares testing my annual value level at $34.22, my model showed Apple had become 12.5% undervalued. Investors looking to buy Apple could have done so on that pullback to $34.22.

At its Thursday close of $43.29, Apple was 4.4% overvalued, with fair value at $41.45. Because Apple has been rallying, the weekly chart profile is the one to consider, and it currently is positive, which means it is not giving us a clear signal to book profits. Investors who are looking to make short-term trading adjustments should know that my monthly value level -- at which to buy -- is $42.79 and my monthly risky level -- to sell -- is $43.90.