A few stocks I own or plan to buy an initial position such as GLW provided a great opportunity today as the whole market ended down. I wrote on Friday last week that I wanted to add Lorillard (LO) to my positions but the trade would execute only if the stock goes higher.

Today it didn’t continue in the morning’s march into higher levels and ended down although my entry point got almost hit and I would pick up a losing position. Today’s high price reached $41.69 a share and my buy order was sitting at $41.77.

Later the whole market collapsed and took almost all stocks with it. A typical behavior which every investor knows or should know. Besides LO I would like to add AT&T to my current positions and open an initial position in GLW stock.

How I set my entry point into stocks

I will use Lorillard as my example how I entry into stock positions. Last week the stock got hit hard. It fell from $42.76 a share to $41.15 and today to $40.80 a share. The drop was 4% and almost another 1% today. After such a huge drop on Friday I would typically expect a recovery, but the overall market pushed the stock lower.

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I like to use FreeStocksCharts when not at home where I use Think or Swim or Strategy desk. I like to see all three time frames (6 months daily chart – the largest one, 5 minute 1 day chart and 5 year weekly chart) to see where the stock is to make a decision when to buy.

Three time frames

5 year time frame

After I screen for a dividend paying stock I take a look at the 5 year chart to see where the stock is related to the long term behavior. From the 5 year chart I can see LO trending up (see the yellow trend line), but recently during August 2012 and November 2012 the stock dropped down to its long term trend line (it touched the yellow line again). Although it doesn’t mean that the stock won’t go lower, I consider this as a good price position for adding the stock. It is on its long term uptrend support and most likely will continue up.

It can break the trend, for example when the Government tighten the regulation in tobacco industry. If that happens I will postpone adding new positions to my holdings and most likely wait for the bottom. I will not be trying to fish the bottom, but I will wait e.g. for the next possible support, which would be on 5 year 200 day MA where I would expect the stock to stop its fall. If that happens and the stock reverses I would pick up a few shares on the way up.

From the 5 year chart I can see that the stock is a buy (not extended as it was at the beginning of 2012).

Fair value

Then I take a look at the stock’s fair value. I use Morningstar.com to check their value. As of today, Morningstar is listing a fair value to be $43.00 a share. I run my own calculations and my calculated fair value is at $41.58 a share, which is about in line with Morningstar numbers. I also calculate annual expected return and LO is at 21%. Then I check the current price action. LO is trading as of this writing at $40.80 and thus providing a safety margin of 1% to my calculated fair value. Still a buy to me.

6 months time frame

The next step would be a look at 6 month daily chart to see the stock behavior from the short term perspective. Is there a potential for growth or will the stock fall? I briefly scan my holdings daily. If the stocks are running up unstoppable I am not interested in them and screen for another candidates or keep cash in sidelines. If however the stock fail making new highs and reverses like LO did last week, it gets my attention. The stock ran up after a good earnings report and dividend increase announcement 12 days ago. Would you buy in this hype rally? I wouldn’t.

The stock traded below 200 day MA (the red line) but above 50 day MA (blue line). I could pick up shares when the stock was at lower Bollinger Band below the trend line e.g. in January 2013, but at that time I didn’t have cash available (still struggle creating cash reserves). Then the stock ran up to upper Bolinger band and broke thru the 200 day MA with an extended bullish candle. A good sign, but I want to pick the stock at the lowest possible price, not this hype.

Daily chart

I do not use this time frame much, only in occasions when trying to enter the stock and trying to pick up a few pennies. Sometimes I use this when trading options, but very little when entering my portfolio core dividend positions.

Opening a trade order

I already wrote about this strategy. It is not my original strategy and many experienced traders apply it when entering a stock position.

If the stock which passed through my fundamental screening (dividend growth stock) behaves technically as described above I enter a contingency order with my broker. If you take a look at Lorillard’s chart, you can see the stock falling. I calculate what would be my activation price for the next day. Refer to my previous article how I do it. Also you can read Dave Landry’s book The Layman’s Guide to Trading Stocks where he describes this strategy in a very plain English.

There will be three possible outcomes:

1. The stock will continue down as in LO case today.
2. The stock will reverse and go up.
3. The stock will gap up far beyond your limit price.

A contingency order

First let’s take a look at the contingency order. I open an order which would look like this:

If the last of LO is greater or equal to 41.77 Buy 24 LO at limit $41.77

If the stock continues down or even gaps down, the next trading day I adjust the price based on the new calculation:

If the last of LO is greater or equal to 41.26 Buy 24 LO at limit $41.26

if the stock reverses and goes up, the activation price is hit and the limit order becomes life. Usually this happens at the same time and it gets executed immediately (at the same time with activation of the order). In some occasions when the stock moves very fast up, you may be left behind, but this hasn’t happened to me yet.

The stock will gap up. If this happens, the activation process activates the limit order, but the order is not executed. Then I once again check the charts if I want to chase the stock, cancel the order or leave it alive as “Good-till-canceled” (GTC).

Since Lorillard dropped in price, I adjusted my entry limit order and will wait for tomorrow’s trading.

AT&T and Corning at the same boat

That said, the other two stocks popped up today as great candidates to buy. One stock is AT&T (T) and the other is Corning (GLW). I am not buying these stocks yet, since they didn’t fall far enough. I am however watching the stocks closely and if the trend reverses I may add a contingency order for AT&T. It broke 200 day MA down. The stock struggled to stay above it and may continue down to hit lower Bollinger Band along with 50 day MA (it can go to 34.5-ish price level from current $39.15) mainly if the market continues or speeds up its sell off.

As far as GLW goes, I will be applying a different strategy to buy this stock. I will apply put selling to get assigned. Most likely I will sell 12 strike put. But I haven’t analyzed this stock and trade yet, so I cannot say.

Conclusion

There are investors who do not care much about entry points into the stocks, some apply regular investing approach investing smaller amounts every month and averaging the stock cost basis. And that is a completely legit strategy and I am fine with it. Other investors apply the similar “cherry picking” strategy as described above and they are waiting for their price. I like such approach, because I believe using this way of entering the stock an investor can boost capital gains (although with dividend investing it is not an overly important aspect).