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Frequently Asked Questions

I am an amateur investor that loves your approach to investing and the explanations you provide for decisions made. I feel that stocks move on “momentum” when fundamentals and technicals are favorable. Isn’t the RSI a “momentum” indicator?

Aug 01, 2017

Thanks for your kind words! The relative strength index (or RSI) is a technical indicator that serves as an overbought/oversold oscillator to measure a stock against itself. It could be considered a momentum indicator when it is moving in one direction, but I wouldn’t put that label on it. There are many times when the RSI moves sideways in overbought territory as a stock remains in a very strong uptrend. In that situation, it would not be a reliable measure of the stock’s true momentum. This can also be said for when a name is falling and the RSI is low.

However, momentum does come into play when using the RSI to identify buy signals. The index is a scale of 1 to 100, and when the RSI moves out of oversold territory (0-30) and back into the neutral zone (30-70), it creates an RSI crossover buy signal.

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What is the best strategy for trading around earnings?

Jul 26, 2017

If I had a nickel for every time I came across an investment strategy that claimed to know how to trade earnings I would be a very wealthy man. Unfortunately I’m not swimming in nickels, and the folks who followed the advice of the so-called experts are likely on the lookout for some extra cash.

When it comes to trading around earnings – by that I mean buying a stock right ahead of its report because you think you know what will happen – the only true statement is that it is pure gambling. Unless you have some sort of insider information – which you’re not allowed to trade on anyway – there is no way of truly knowing what the actual numbers will be. And it’s even more difficult to predict how investors will react to the report and management’s guidance.

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Would you consider recommending options?

Jul 21, 2017

I believe there is a time and place for options in investing, but I don’t see them fitting into our current approach here in NexGen Investor. Not only does the shorter-term nature of options run at odds with our longer-term investments, but they also carry a serious risk factor that not all of us have the tolerance for.

That said, I do have a lot of interest in options personally and have studied different strategies that range from longer-term covered call plays to more complicated shorter-term trades. I’m not ruling out a future newsletter that incorporates some of these tactics, so if you’d be interested in that kind of service please let me know by emailing service@nexgeninvesting.com.

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What is the difference between stop-losses and critical support levels, which you use a lot in your services?

Jul 15, 2017

This is a good question and an important point to clarify: stop-losses and critical support levels are not the same thing. The critical support level is the area that a stock needs to hold on a closing basis in order to remain bullish in the short-term. That level could be price support, a trend line, a moving average, or another level of support altogether.

The reason I refer to them as critical support versus a stop-loss is due to the volatility in individual stocks. There are many instances when a stock breaks the critical support level intraday and rallies back to close above the support level. Or a stock may break support for a couple of days before rallying. If we only used stop-losses (orders you place with your broker that automatically trigger when a stock hits a specified price), it would result in us getting kicked out of a position during any intraday pullback and missing out on subsequent rebounds.

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What criteria do you use for the RSI?

Jul 12, 2017

One of my favorite and most important technical indicators is the relative strength index (RSI). You can check out my feature on the RSI to learn more about it, but the main criteria to focus on is the time setting. There are a few different time settings you can use with the RSI, and the industry standard is often a 14-day timeframe. However, my preference is the 9-day period setting, which takes the last nine trading days into consideration to determine the RSI number.

This is particularly helpful in identifying buy signals. The index is a scale of 1 to 100, and when the RSI moves out of oversold territory (0-30) and back into the neutral zone (30-70), it creates an RSI crossover buy signal.

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What is the most important metric you pay attention to in your technical analysis?

Jul 05, 2017

Boy, it’s hard to pick just one! Every chart is different. But if I had to point you to one, I’d go with the moving average. This is a trend-following indicator that is based on past prices and helps determine support and resistance areas. It’s one of my favorite ways to zero in on the strongest opportunities on my screens, as well as identify buy and sell levels.

I will most often focus on the shorter-term 50-day moving average (the stock’s average closing price over the last 50 days) and the longer-term 200-day moving average (over the last 200 days). Both of these give you a good idea of a stock’s true potential and make interpreting a chart a lot easier!

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How do you see the next earnings season playing out?

Jun 22, 2017

There’s no question that earnings over the last few quarters have been impressive. I’ve gone into recent reporting cycles far more bullish than the analysts, and often even my bullish growth predictions were exceeded. The next quarter should be more of the same as corporations are in the sweet spot right now with low interest rates, modest inflation and a strong labor market. I believe we’ll see more companies beat estimates on both the top and bottom lines in Q2, setting us up for another successful earnings season. Continue Reading…

I have been hearing a lot about Bitcoin. Is it time to buy?

Jun 20, 2017

This question made me chuckle because I’ve heard it from multiple people recently! When the woman who cuts my hair, the man next to me on the plane and a relative all ask me about a specific investment, it raises some red flags. That may sound like the opposite of what you might expect, but the overexposure Bitcoin seems to have right now makes me wary in the short term. I do believe that cryptocurrencies are real and that they have a place in the future, but Bitcoin in particular needs to come back down to earth before it becomes an attractive buy. Continue Reading…

Since the market can get choppier in the summer, would you consider using hard stop-losses to protect us on the downside?

Jun 18, 2017

The market historically does get more volatile in the summer due to lower trading volume, but it doesn’t necessarily mean we need to change our risk management strategy. I will rarely place a hard stop with a broker on a longer-term holding stock because weathering the swings is part of investing. Plus, I'd prefer to watch my holdings on a daily basis. A hard stop-loss can often cause you to sell out of a position at a low point and miss out on a near-term rebound. Instead, I utilize critical support levels (key levels on a chart, such as moving averages or previous areas of price support) to monitor the action and determine if a change needs made.

That’s not to say I don't ever use hard stops. In fact, they can sometimes be helpful in protecting gains.

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What are your thoughts on Square (SQ)?

Jun 15, 2017

Of the two widely-regarded tech companies that Jack Dorsey has helped create – Square (SQ) and Twitter (TWTR) – I’d put my money on the former. The mobile payments company is a standout in one of my favorite NexGen trends, and this week Apple (AAPL) announced plans to take on SQ and its peers in the mobile payment game. I have to believe Apple will eventually be successful, but I also believe there will be multiple winners with SQ being one of them. However, I wouldn’t be a buyer just yet. The stock is up a lot recently, so I’d recommend waiting for a pullback before establishing a position. Continue Reading…
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