The Big Picture
Stockscores.com Perspectives for the week ending March 6, 2005
In this week's issue:
When you look at a chart, where do your eyes focus? Do you look at what is happening right now, or what has happened over the last two weeks? Do you look at the whole chart to get a feel for the long term trend?
Many traders can get lost in the details and fail to see the big picture. In doing so, they take very short term entry signals that contradict the longer term trends. When looking at charts, it is important to not just focus on what is happening now, but how that relates to what has happened recently.
For example, suppose you are looking for breakouts through resistance as a signal to enter a trade. The idea behind this entry signal is that a breakout to new price levels implies a significant change in fundamentals that warrant higher prices.
There are lots of breakouts, but if you only focus on what has just happened on the chart, the breakout you buy may not work because it contradicts the longer term outlook of the market.
Remember that there are many different groups of investors and traders acting in the market. A short term trader looks at short term charts. Position traders look at longer term daily charts. A long term investor considers longer term weekly charts. The short term trader may see a buy signal on a stock while the longer term investor may consider a stock a sell.
If you are buying a short term breakout that contradicts the longer term trend, then you are on the side of other short term traders, but working against longer term investors. Ideally, we should go with the opinion of as many groups of market participants as possible.
When looking at a chart, remember to see the big picture. Ask yourself whether the buyers or the sellers are in control, but consider different time frames. What are the day traders doing? What are swing traders doing? What are investors doing? When all groups are doing the same thing, you have a higher probability of success.
When I am day trading, I use intraday charts to pick my entry and exit signals, but I also look at daily charts to see what the longer term traders and investors are doing. When I am position trading, the entry and exit signals come from daily charts, but I will go back a year to see where longer term support and resistance are, and consider how those will affect the trade.
Being a myopic trader can be dangerous because you can be fighting the crowd. Look at the big picture to improve your profit potential.
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A common theme among Head and Shoulder Bottom, Ascending Triangles, Pennants and Rectangle Consolidation patterns is a break through resistance from low price volatility, usually with volume supporting the breakout. Rising price bottom formations in to the breakout point are common, but what market dynamic do these patterns really represent?
Rising bottoms are a sign of growing optimism among investors. As time passes, they demonstrate a weakening of selling force and increase power among buyers. As a stock moves up toward a resistance price point, the market is faced with the upper limit on what investors believe the company to be worth. We often see that stocks will go in to narrow trading ranges under resistance as investors come to a consensus on the value of the company. When stocks break out from this condition, they may be signaling significant new fundamental information at work in the market since resistance has been broken from strong consensus out of a period of optimism.
The Sentiment Stockscore is useful for finding optimism in the market, and the Signal Stockscore is heavily weighted on the abnormal market activity that comes with breakouts. By looking for stocks that have a Sentiment Stockscore of 60 or higher, and a Signal Stockscore of 80 or higher, we can consider charts that may have a good chart pattern set up. The Stockscores Simple Market Scan adds in some other technical filters to shorten the list of potential candidates further.
This strategy is not solely about finding stocks with good Stockscores. The most important step is visually inspecting the charts to ensure that the chart patterns are what we are looking for. A good chart pattern will have the following characteristics:
A break through resistance
Abnormal activity, in terms of price and volume activity
The break through resistance should be from a period of low price volatility. Low price volatility is characterized by the price range of trading on each day (how tall the trading range is on the chart) and by the range of trading over a number of days (are the trading days side by side on the chart, or is there a price trend?)
A show of optimism leading in to the break through resistance from low price volatility.
It is necessary to have all of these criteria, many traders forget to check whether the stock was trading with low price volatility before the breakout, or to make sure that the stock is truly breaking through resistance and will not encounter more selling pressure soon.
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1. T.MAE
T.MAE is breaking from a flag pattern with abnormal volume and looks like it can move up toward resistance at $1.80. With support at $1.45, there is a decent risk reward trade off on this stock. The chart is not ideal, but because the Canadian speculative stock market is strong right now, I think that this stock is worth considering.
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References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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