How Individual Investors Can Win In Choppy Stock Market Uptrend

In a bear market, no bullish strategy will work consistently. Most stocks will go down, and the wisest choice is to sit out as much of the down cycle as possible. In a strong bull market, buying fares much better. And in a choppy or sideways market, stocks can be bought, but excellent portfolio management skills are needed.

How can an investor use IBD to make money in a choppy uptrend

Look for quality institutional support. Insist on a solid EPS Stability Factor (numerous stocks covered in The Income Investor feature it). And look for action or inaction that drives out weak holders.

In May 2012, Walt Disney (DIS) had a long base, quality institutional support and a five-year EPS Stability Factor of 9 on a scale that runs from 0 (calm) to 99 (wild). Here's how it could've been played: • Buy: On May 4, 2012, an IBD article on Disney noted that a 14-month-long base offered a potential buy point at 44.60. The base was long, and as the article said, "such bases have fewer weak holders." (Time wears them out.) The stock broke out May 9 in fast trade. After the breakout, the stock eased 2.4% below the entry but never triggered a sell rule. A buyer was able to sit tight.

• Sell: On Sept. 28, 2012 (1), IBD noted that Disney had risen as much as 19.7% above its 44.60 buy point and individual investors "could consider taking profits.

• Buy: On Jan. 24, 2013 (2), an IBD story noted, "After three sessions of trying to clear a 52.43 buy point, Walt Disney got the job done." Clearing the buy point provided an opportunity to re-enter the stock.

• Sell: The stock rose 29% in four months, making a sale at the usual 20% to 25% profit-taking zone possible in May (3).

• Buy: On July 15, 2013, an IBD article pegged a new entry point at 67.99. The entry point required a watch list and patience. The stock didn't break out in volume until Nov. 8, 2013.

• Sell: The stock rose 23% in four months, reaching the profit-taking zone in the same time period.

• Pass: IBD didn't mention the next potential entry because it was in a later-stage base. The stock broke out in June 2014. It didn't rise much before consolidating.

• Pass: A three-weeks-tight pattern in early January this year would've been tough to play. Trade on the breakout at 96.03 was below the 40% minimum volume spike. The stock fell 6% below the entry before rising to good gains. Technically, an investor could've held through the 6% retreat, but realistically, many IBD-style investors will dump a stock before it triggers the 8% sell rule. The 8% rule is designed to make 8% the worst loss, not the typical loss.

Even if he'd missed that last move, the investor who played the three buy and sell signals could've had three 20% or more gains.

Three more points: One, Disney might have seemed too conservative to fit the aggressive trader's preference. Yet in a choppy market, steady stocks are easier to hold.

Two, an investor can do well without getting all of the move. Restraint is prudent in a choppy market.

Three, using the rule to take profits at 20%-25% makes sense in a choppy market. Sitting through a correction is risky when market gains are hard to come by.

(Editor's Note: Follow Paul Whitfield on Twitter: @IBD_PWhitfield.)