How to Find Strong Stocks During a Stock Market Correction

Stock Market Corrections occur when the market indices drop 10% or more off their recent highs. During a market correction, traditional growth stocks may drop 20-35% off their highs.

Market corrections, while intimidating, provide an opportunity to reassess the performance of individual stocks. As the market finds strength and moves off its lows, the stocks withstanding selling pressure are the potential leaders of the next uptrend.

Ideally, your trading system includes tight risk management with strategies to sell into strength and rules for cutting losses. When the market tops and begins a new downtrend, active swing traders are selling while investors begin to reduce their size as they raise more cash for the next uptrend.

This blog provides five strategies that will help you find the strongest stocks during a stock market correction that will quickly recover and lead the market higher.

How to Navigate a Stock Market Correction

Trading during a stock market correction can be straightforward: Avoid purchasing stocks.

Understand identifying the exact bottom is impossible and channel your efforts into productive activities. During a market downtrend, leverage your time to engage in studying, researching previous market corrections, reading, and post-analysis.

Create a series of stock screeners looking for Relative Strength you routinely analyze. You may run these screens at specific times of day, after the market closes, or on the weekends.

Why Relative Strength Matters in a Stock Market Correction

Relative Strength is based on the principle that a stock in high demand will show strong price performance compared to the overall market and other stocks.

During stock market corrections, large institutions will take advantage of lower stock prices and continue to accumulate the best stocks. During these weak market periods, institutions add to their highest conviction ideas for the next market trend.

Relative Strength is a subtle clue that can be used to help zero in on stocks with institutional interest.

How to Use the Relative Strength Line

The Relative Strength (RS) Line is a visual representation of how an individual stock is performing compared to the overall market.

Relative Strength is a leading indicator that corresponds directly to the price action of a stock. When an individual stock is outperforming the market, the RS Line points upward.

In any market, a rising RS Line indicates strength.

Just like we look for stocks making new highs, watch stocks that have RS LInes making new highs.

Adjust to the current market condition to any time frame including 1, 3, 6, 9, or 12 months when screening for stocks that have RS Lines making new highs

RS Line New High Before Price Uncovers Leaders

Stocks that are breaking out into new highs are often the next leading stocks of the market cycle. The same goes for stocks with RS Lines breaking into new highs.

Depending on market conditions, the strongest stocks have RS Lines breaking out into new highs Before the Price of the stock.

In extremely severe stock market corrections, stocks that are moving sideways will show RS compared to the broader market that is decreasing in price. This will cause the RS Line to trend higher while the price of the stock consolidates sideways.

Be on the lookout for stocks that have RS Lines making New Highs Before Price.

Screen for stocks that have RS Lines making new highs before price ranging from 1 to 12 months.

Why Relative Strength Days Matter

Relative Strength (RS) Days, occur when a stock is showing relative strength compared to the broader market. Analyze a stock’s daily performance to consider how the price moved in comparison to the action of the index.

When screening and monitoring your watchlists, you should always consider how the action of an individual stock is compared to the action of the indices and other stocks.

Stocks that exhibit RS Days over 60% of the time during stock market corrections are potential leadership stocks you want to focus on when the market turns.

This “OR Group” is part of a Screener Preset that looks for stocks exhibiting RS Days over 60% of the time.

How Gap-Ups Can Signal Strength

Downtrends often exhibit heightened volatility and significant price swings. News-driven sentiment shifts can lead to substantial gaps between the previous closing price and the current day’s opening price.

Stock market corrections routinely see market sell-offs after a gap up in price. A sign of accumulation is seen when a stock can withstand the selling pressure and closes off the lows.

A Daily Closing Range (DCR) over 45% is considered off the lows. look for closing ranges in the upper third of the day’s range, as a higher DCR is considered a sign of strength in a weak market.

Utilize a screener on days exhibiting a gap-up that includes a strong Daily Closing Range.

Why Up on Down Days Show Leadership

Finding strength doesn’t need to be complicated – If the stock is performing better than the market, it is exhibiting Relative Strength.

The simplest, and one of the most important, screeners you can utilize is to look for stocks that are up when the market is down.

During a stock market correction, look for stocks that are under accumulation. Add liquidity and general technical constraints in addition to any RS screening criteria to ensure you are focused on the best stocks.

When the current trading session is under distribution, look for stocks that have a high Daily Closing Range (DCR) and are less than 1% down.

The Best Stocks Lead The Market Higher

If a stock repeatedly shows up in your screeners, there’s a good chance it could emerge as the next market leader. The most robust stocks will consistently hit new highs as the market starts to stabilize before a significant upward rebound.

When selling pressure is released off the overall market, the stocks near highs will continue to make new highs.

Key Takeaways

Stock Market Corrections, while unsettling at the time, offer a unique opportunity to identify potential market leaders for the next uptrend.

Search for Relative Strength. Look for stocks with RS lines near highs in relation to the base it is forming in the current market downtrend.

Patience is key: Maximize your time on constructive activities instead of trying to find the exact bottom. Overtrading can cause severe damage to your portfolio.

Create multiple screeners and routinely update your watchlist with stocks that display Relative Strength.

By focusing on relative strength and institutional accumulation, you’ll be prepared to trade the next market uptrend with confidence.