My Favorite Technical Indicator Can Predict Any Stock’s Future

Editor’s Note: Last week, I introduced my Straight Up Profits readers to technical trading expert Chris Johnson. And you all loved his take on volatility so much that I wanted to bring him back today to talk about his favorite technical indicator – and give you his outlook on an auto stock headed for profits.

I’ve been in this business long enough to have seen an incredible evolution of investing.

Don’t believe me? Well, my first stock charts were drawn by hand (mine) on graph paper. I was tasked with updating a three-ring binder of charts with each company’s respective closing price, followed by calculating moving averages for each.

It was 1991, and there were no charting software applications or supercomputers of databases – just a three-ring binder. That simple daily task taught me an important lesson…

In data we trust.

It also gave me my first experience with what has become my favorite technical indicator: the 50-day moving average.

Remember my Ten Commandments of Trading? Last week, I told you about one of them: volatility is a trader’s best friend.

Well, the 50-day moving average is the basis of another commandment – the first one, in fact:

The trend is your friend.

You see, by looking at a stock’s 50-day moving average, you can uncover a key factor about the stock’s future…

Where it’s headed.

This is the closest you can get to seeing the future – but you have to know just how to read that 50-day.

And today, I’m going to tell you how to do just that…

The Trend Is Your Friend – Explained

I know that this saying is bandied about by traders and investors as one of those “duh” sayings when it comes to investing, but it’s much more important when it’s quantified. That’s when it really earns its credit.

Over my 30 years in the business, I’ve spent thousands of hours “quantifying the trend,” and it all goes back to that graph paper.

You see, I’ve created a modeling system that determines and compares the slope of a stock’s 50-day moving average over several periods of time, each day. That process, while a little laborious and data-heavy, takes the comparisons of 16 points on the stock’s 50-day moving average plane to determine these slopes. And it results in one of three classifications for a stock:

  1. Bullish
  2. Neutral
  3. Bearish

Now, it’s pretty cool when you see that reading on one stock, but it’s way cooler and more helpful when my model does that for more than 8,000 stocks in about two minutes! Now you’re trading with some real firepower.

Let’s get down to brass tacks and how this simple commandment – and a complex data-centric model – is going to help you trade next week.

This morning’s run provided three new stocks of interest to my list (out of 8,000). Here’s the table list results…

The results yielded fewer results than normal, but that’s to be expected, as this overbought market is starting to show signs of slowing ahead of what is likely a healthy correction.

One of the stocks has already caught my eye: Copart Inc. (Nasdaq:CPRT). Copart operates online vehicle auction and remarketing services to automotive resellers. That’s a space that I already like, the used car market. But we can talk about why another day.

For now, CPRT is trading about 11% off of its recent highs. Conveniently, that’s what I consider a “healthy correction.”

The stock is also trading with support from both its 20- and 50-day moving averages. That’s what we like to call “technical support.”

And circling back to the genesis of today’s lesson, my models (and my eyes) caught the fact that the stock is finding that support from a 50-day moving average that is on the rise, indicating that CPRT’s trend is indeed friendly.

See, when the 50-day is moving up, that tends to mean the stock is on its way up as well. And when the 50-day is moving down, the opposite is true – the stock is likely headed down.

Now, put all of CPRT’s indicators together and you’ve got a bullish, intermediate-term outlook (4-6 weeks) with a target price of $130.

And when you can drill down to that detail, boom – you can cash in.

Bottom line, my outlook for CPRT shares leads me to a “buy” recommendation using a price of $116 or less. You could leverage that move with a call option, but we’ll get to that discussion a little further down the road.

I’m excited to connect with you again soon…

Chris Johnson

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