Buying a stock simply because it has fallen 30%, 40% or even 50% can be dangerous. Stocks usually get beaten down for a reason, and what looks cheap today can always get cheaper tomorrow.
The more interesting opportunity may come when the evidence starts showing that the downtrend itself is changing.
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In his latest live webinar, Barchart Senior Market Strategist John Rowland, CMT, demonstrates how he uses the Phoenix Rising Screener to search for stocks that have been knocked down but are beginning to show the first signs of a potential reversal.
Start With the Stocks the Market Has Left Behind
The Phoenix Rising methodology deliberately searches among stocks that aren't currently market leaders.
The screener starts with Russell 3000 stocks carrying a Weighted Alpha below -15, identifying names that have significantly underperformed over the past year. It also requires a Barchart Opinion Sell signal, confirming that the broader technical picture remains weak.
Then comes the potential turning point: TrendSeeker must have generated a Buy signal.
That combination is what makes the screen interesting. The stock has performed poorly and hasn't completely repaired its longer-term technical picture, but its intermediate trend may be beginning to move in the opposite direction.
The screener isn't saying the stock has bottomed. It's identifying a candidate worth investigating.
Is It a Bounce or a Real Reversal?
That's where John's confirmation process begins.
Rather than relying on one indicator, he looks for multiple pieces of evidence that sellers may be losing control. Is price beginning to make higher lows? Has it reclaimed important moving averages? Are RSI and MACD improving? Has former resistance been broken? Is volume beginning to increase behind the move?
Bollinger Bands can add another layer. John looks for periods where the bands contract as a beaten-down stock stabilizes, followed by price reclaiming the middle band and potentially breaking toward or through the upper band as momentum returns.
Barchart Opinion Strength and Direction can also show whether the underlying technical picture is gradually improving, even before the overall trend flips completely bullish.
A Case Study: Ollie's Bargain Outlet
John demonstrates the process using Ollie's Bargain Outlet (OLLI), a stock that had fallen roughly 58% before beginning to show several characteristics Phoenix Rising is designed to uncover.
Price began producing higher lows, reclaimed its 20-day, 50-day and 100-day moving averages, and challenged an important resistance area. RSI and MACD improved, TrendSeeker generated a Buy signal and volume provided another clue that participation was returning.
The point isn't that every beaten-down stock displaying these characteristics will recover. It's that the setup now has something more substantial behind it than simply, "the stock is down a lot."
Turn the Screener Into a Complete Workflow
John doesn't stop with the chart. He also looks at how the stock is performing relative to its industry, sector and the S&P 500 Index ($SPX), then searches for potential catalysts such as earnings, guidance, analyst activity, new products or other company developments.
That creates a much more disciplined reversal workflow:
Find the beaten-down candidate → Look for a change in trend → Confirm momentum and volume → Check relative strength → Identify potential catalysts → Decide whether to trade it or keep watching.
That's ultimately what Phoenix Rising is designed to do. Instead of blindly buying falling stocks, it gives traders a starting point for finding names where the evidence may finally be changing.
Watch John Rowland's full Phoenix Rising webinar to see how he builds the screener, analyzes potential reversal candidates and uses Barchart's technical tools to separate a simple bounce from a potentially larger trend change.
Register to be notified the next time John goes live with an educational webinar >>
On the date of publication, Barchart Insights did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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