When Is the Best Time to Buy Momentum Stocks?

May. 7.08 | About: Apple Inc. (AAPL)

Last summer I pontificated about the future of Apple Inc. (NASDAQ:AAPL) wondering if it was time to sell:

All the smart and “hot” money has been trading it and riding it higher. And you can bet they will run for the exit at the first sign that the party is over. Which is why I watch Apple so closely. I’m seeing a confluence of things which gives me reason to believe that the ride may be over.

So how did I do?

Well, Apple thoroughly spanked me. The only tattered consolation I can cling to is after writing that, the rocket ride known as Apple paused for the rest of the month of June. The only thing that knocked it out of the sky was the general market tumble in mid-July. It found footing where it had paused earlier and off it went again when the market recovered.

I’m bringing this up for two reasons. One to review a past call and award myself a meager C- and two, to talk about entry into momentum stocks. Most technical traders agree that momentum stocks provide a great opportunity. As the saying goes, “the trend is your best friend.” Or, bodies in motion tend to stay in motion.

This is especially true when the market has corrected and is about to find its footing again. It is a very rare momentum stock indeed that can completely buck the general market tone. Apple certainly didn’t and it was one of the best performers in 2007.

The general market is like the tide or the waves of the ocean. It is a background element common to all boats (stocks). But some boats have better hulls and more hydrodynamic shapes. So they will react differently to the same common element.

Apple carved out a rounded bottom at $120/share, just as the S&P 500 found its footing. For AAPL that level also coincides with previous important points of support. From there it launched into an astounding recovery which left other stocks in the dust. While it has now easily reached the heights it once claimed in late 2007, the S&P 500 is still more than 8% below its highs of October 2007.

Although most would agree that it is smart to ride the momentum of stocks like Apple, they can’t agree when exactly they should enter it. I would suggest that the best time is when the market has exhausted itself within a correction and is about to bounce back. This allows you to define your risk and base it on support levels, removing guesswork.