Technical Analysis

Martin Zweig uses rough and ready technical analysis methods to decide whether particular stocks are popular with the market and hence likely to continue to rise in price.

From his fundamental analysis of stocks, Martin Zweig finds fast growing companies that are selling at attractive prices relative to their earnings.

He then uses technical analysis to identify stocks whose price action is better than the market average, buying strength and selling weakness.



Rules For Buying

Zweig's technical rules for buying individual stocks are less well defined than his fundamental rules. He prefers to leave it to others to choose their favourite technical indicators. Overall, he seeks stocks whose price action is stronger than the market average. This means, he says, that he is never able to buys stocks at the lowest possible prices but benefits from an increased probability of success. Some specifics:

Suppose the market has been very strong of late. Obviously, then I am going to eliminate any stock that hasn't been keeping pace. Stocks wallowing near their lows, or in obvious downtrends on the charts, are definitely out.

And:

In a very strong market, the very best kind of action is a clear uptrend on a chart where you see a series of higher highs and higher lows - sort of a stepladder on the way up.

Clearly, one of Zweig's preferred technical method for selecting individual stocks is trend-following. Having purchased, he holds stocks whose price continues to trend upwards.

In addition to trend following, Zweig also likes to buy price breakouts. If the general market has been moving sideways and a stock he is interested in has also been moving sideways, but then breaks out to new price highs, he would consider buying the stock.



Rules For Selling

Martin Zweig holds stocks until the price action weakens. Obviously, he hopes that this will only be after the price has risen appreciably. Sometimes, however, the price action can weaken soon after he has bought:

Basically what I do is place a stop, generally 10 to 20 percent below the current price, whenever I buy a stock. The exact level depends on my own analysis of a stock's trading pattern. If a stock violates this stop, I'm out.

If the stock price rises, Zweig uses a trailing stop, raising the price at which he will sell when the price action eventually weakens.

He sets his trailing stops using a variety of methods and says the way he deals with stops is more of an art than a science. Stocks whose price action is highly volatile are given more generous stops - in other words they are allowed to fall further before they are sold - than stocks whose ups and downs are less violent.

Zweig says, "According to my rulebook, the only consistent way to make money in the market is to cut losses and run with profits. You can be right on individual stocks as little as 30 percent of the time and still do well if you can get out when the going is good".