Pay attention to these 5 signs to buy a stock

What are the most important signs to buy a stock on the ASX or any other stock exchange? In this article, we recap what we think are the 5 most important signs.

5 signs to buy a stock

1. When the RSI has gone above 30

This can be a good sign to buy a stock. A company’s Relative Strength Index (RSI) measures buying v selling momentum. When the RSI is below 30, it is typically considered oversold. But when it emerges above 30, it is a sign investors are getting back into it, but there’s still some way to go.

You may choose to invest below 30, but there is a greater risk at this level that it might fail to break out.

2. When the share price exceeds the resistance level or touches the support level

A stock’s resistance level is the price point at which an upward trend in a stock’s price tends to stop or reverse, and starts to fall. Resistance levels are determined by analysing historical data on the stock’s price movements over time. Generally, if the stock has traded below its resistance level for some period of time, it will continue to do so until something changes in the market dynamics that makes investors believe that it may break through this current barrier.

When a stock breaks through its resistance level, we think its one of the best signs to buy a stock. Take the below chart of Breville (ASX:BRG) from mid-2023 for example. In this instance, you might conclude it is time to buy when it breaks through $23.22, which appears to be its resistance level. Similarly, you may want to jump in if and when BRG trades around the support level of $17.70.

Breville (ASX:BRG) share price chart, log scale (Source: TradingView)

3. When a stock is about to report results and they appear to be favourable

This one may be blatantly obvious in principle. But just how can you tell when results will be favourable?

One way is if a company has issued guidance and it appears positive. You may wish to bet that the company will deliver on its guidance, or perhaps even better. Another is if consensus estimates appear positive. You may also wish to buy after reporting season if the company issues solid guidance for the year ahead – but this is a more risky strategy because a lot can happen in 12 months!

4. When the company is undergoing (or is about to undergo) a transformation for the better

Sometimes, companies undergo transformations for the better. They may pivot their business model to a higher-margin segment or just gain a new revenue source. Potentially, it might make an acquisition that give it exposure to a better market. And this might be the opportunity to buy, when other investors have not realised how good a move will be to the company’s bottom line.

One of the most obvious examples was Pro Medicus (ASX:PME) and its acquisition of the Visage platform in 2009. In the depths of the GFC, few investors were prepared to believe that it would deliver that much, let alone be the game changer that it was for the company. But those investors who took a punt back then and held for all those years reaped the rewards.

5. When it is undervalued…genuinely

This is blatantly obvious. But it is easy to think a company is undervalued. You need to be genuinely sure it is. Not just because the stock price is low, but because your stock is genuinely a good company and will re-rate.

Does your stock have a good market share? Does it have solid margins? Does it have little to no competition and/or high barriers to entry? And does it have upcoming catalysts – whatever they may be?

If all those answers are yes – then it is a sign that it is time to buy.

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