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ETFs and the buy zone; shares in companies which score 10+

January 17, 2023

The buy zone is a new idea I have had but one which is apposite to current circumstances and especially applicable to ETFs (remember what they are, collections of shares usually constructed to mirror an index, which can be traded on stock exchanges; unfortunately it can be hard to buy them if they are not UCITS, kosher under European regulations, but plenty are).

How does the buy zone work? An ETF enters the buy zone, when one of two conditions is fulfilled. Either its Coppock indicator starts rising from a positive position or ideally and more adventurously when its Coppock indicator turns negative. It then stays in the buy zone while its Coppock indicator is falling, when it turns higher and until it starts to fall.

Note that this a big change from Edwin Coppock’s original concept that you wait to buy for the Coppock indicator to turn up from negative. My plan is that we do not wait.

When Coppock starts to fall the shares enter the sell zone and we will be looking for my other technical indicators (dead cross by the moving averages, broken uptrend line, pattern breakdown, double top) to sell.

The buy zone can be an extended period even running into years. While buying we may follow a programme such as regular monthly pound cost averaging purchases but when we sell we sell the entire holding. Leveraged ETFs will be purchased in a share account but other ETFs might be purchased in a spread betting account where all gains are tax free and there is the option to use leverage. This is what I will do but then as we know I am a gung-ho, crazy, gambler.

Although I want subscribers to realise that everything I am doing is designed to make my gambles less high-risk and more of a sure thing. I am in this to make serious money.

In the chart above the blue horizontal line marks the buy zone for shares in an ETF which tracks Hong Kong quoted Chinese technology shares. Coppock is rising so the shares are still in the buy zone. I used this example because the code is a number which makes it the first share in my table of ETFs. In effect it has been chosen at random.

Allianz Technology Trust (ATT) since the late 90s using buy zone techniques

This is quite a busy chart but shows how my buy zone strategy works over an extended period. I think it works best with ETFs because they are unlikely to go bust so it is safe to buy when Coppock turns negative and the rebalanced portfolio effect means they should always win in the end. Because you only start buying when Coppock becomes negative or turns higher you should always end up buying low, selling high and that is the key to successful investing.

The horizontal blue lines mark the buy zones when it is safe to accumulate shares.You can do this by £-cost averaging, buying on buy signals from my other indicators, buying on green candlesticks, whatever you ike. The Coppock discipline should make sure that you will always emerge a winner; that is the theory at any rate, which we are now live testing in today’s stock markets.

The vertical red lines, which usually coincide with the end of the blue horizontal lines mark the points where Coppock turns down and the shares enter the sell zone. You don’t have to sell immediately. You can use my other indicators to decide when to do that but when you do sell everything goes. So the strategy is buy, buy more, buy more, sell.

As always I must warn that doing this in real time is harder than doing it with 20:20 hindsight but the signals are clear. Coppock is always either rising or falling; it very rarely flat lines and it is certainly always either negative or positive.

ATT at the moment is in the buy zone and has been since May 2022.

This buy zone strategy is at odds with my pattern analysis. I think we have to use common sense here but I am inclined to give priority to Coppock and not worry about the pattern, especially in the later stages of a bear market like now. ATT has a potentially scary pattern but it is an extremely well managed trust run by guys who know the technology sector well. They are going to win in the end so even if it did break down again I think you just buy into that comforted by the negative Coppock buy zone strategy which has worked well on many occasions in the past.

I haven’t done the calculations which are time consuming but I am sure that if I did I would find that the ATT Coppock will give a buy signal in the first half of 2023, probably in the Spring.

There is one tricky period on the chart, which is the blue horizontal line ending in September 2017. It ends before the red because Coppock did have a wobble here. Maybe you would have sold too early, maybe you wouldn’t but if you did the money would have been redeployed into other opportunities so it is not the end of the world.

No indicator is going to be perfect. Investment is always going to require us to keep our wits about us but my structured approach based on a string of technical indicators I believe will be extremely helpful in making us taking good decisions with a bias to buying low and selling high. I have also decided that I will treat ETF shares and shares in individual companies differently when using Coppock, which is partly what this alert is all about.

The buy zone technique works with ETFs because they won’t go bust and should win in the end and that includes leveraged ETFs where there is the potential for phenomenally exciting returns. Individual companies can go bust so we need to be more careful but even so if the company clearly has a large footprint in its market, strong free cash flow and a strong balance sheet a buy zone strategy should be safe enough.

We just don’t want to be stuck building a big position in Peloton or Carvana because that would hurt.

What it means to be a 10+

What I am finding is that when a share in a company scores 9/9 (three indicators positive for the relevant indices, ETFs and the share itself) that is almost certainly going to end up as a 10/10. The fundamentals will look good because that is why it scores 9/9 on the charts.

So how do I categorise the really special shares, the ones which don’t just have great fundamentals but some extra piece of magic that gives them the potential to be a multi bagger, a share that rises three five, ten times or more.

My solution is that these shares are going to be 10+. My plan is that it will not be easy to score 10+. I don’t have any in mind at the moment so they are not going to be featured here today but you can imagine that I will be looking.

This is part of a new concept for portfolio strategy. In our portfolios we cover a lot of ground with ETFs which we buy and hold in line with the buy zone/ sell zone strategy outlined above. Then for shares in individual companies we can either build a large portfolio of exciting 3G shares, many of which will overlap with the ETFs; that is one approach, which I have favoured for years and supported in my publications.

The other approach is to cover the broad portfolio ground with ETFs and spice it up with holdings in individual company shares where there is something really special happening, my 10+ shares.

These 10+ shares are a bit like charts. It is easy to be a genius with hindsight; much harder to make the right choices in real time but that is what I will be trying to do. My intention is that if a share is marked as 10+, there could be fireworks ahead.

Coca-Cola in 1982 was a classic 10+

Warren Buffett is good at identifying these 10+ shares. In 1982 he built a large holding in Coca Cola. The Coca-Cola chart looked amazing in 1982. There was also an incredible ‘something new’ happening. Coca-Cola was spinning off its bottling plants into separate quoted companies so that it could focus on becoming an IP [intellectual property] company with one sensational piece of IP, the formula for coke.

In effect, Coca-Cola reinvented itself as a company much like Apple is now. Its reward was an operating profit margin around 30pc, a focus on creating new versions of its drinks and on marketing. Investors loved it when they realised what was happening and the share price exploded. Buffett has made Coca-Cola one of his shares that he will never sell and so far that has proved a good move.

So that is what we are looking for; let the search begin.

Strategy

As I am sure subscribers have realised I have been using the bear market to figure out what I am trying to do with Quentinvest to achieve the best possible the results. It is extraordinary being able to send alerts on an almost daily basis, something that would have been impractical with print publications.

I want to make us of this opportunity for you and for me, especially as the next bull market gets closer.

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