Make Money Before You Make the Trade
Stockscores.com Perspectives for the week ending April 1, 2005
In this week's issue:
Making money in the market is pretty easy. You just have to do the same thing that the money makers are doing.
Unfortunately, doing so requires a time travel machine allowing you to go back and buy the stocks that the money making investors bought in the past. Since this is not possible, we need to adjust our approach.
Instead, we need to buy the stocks that the future money makers are buying now. Ahh yes, it is all so clear now. We simply need to be clairvoyant.
Or do we?
The oldest military treatise in the world was written by Sun Tzu, and he argued that every battle is won before it is ever fought. I am a firm believer in this idea, and use it in my business practices and any domestic negotiations that I enter in to with my wife. Not to imply that business or marriage is always a battle, but you get the idea.
The reason we can win the market battle before we fight it is because it is possible to copy the trades of the most well informed investors. You see, the stock market is not fair; there are some investors that have better information than others. They act on private information before it is known by the general public and make money.
The stock market is also not played by equitable parties. Every investor has a different amount of capital at his or her disposal, and the biggest investors have the power to move the market regardless of whether their decision is theoretically right or wrong.
So, you have a situation where some investors know about significant fundamental change before it happens, and you also have a market where the largest investment decision makers have the financial might to move a market regardless of whether they are right or wrong.
To make money in the market, you simply have to ride the coat tails of these groups. If an investor is accumulating a large position in a stock, they will push the stock higher. Take advantage of them. If a well informed investor is buying a stock in anticipation of important news, take advantage of them. But how do we know what they are doing?
Simply, when either of these groups acts, they tend to create abnormal market activity. Most of the strategies of the Stockscores Approach seek out abnormal market behavior in some way. If you learn how to apply the Stockscores Approach and understand the idea of abnormal behavior, you can begin to predict what the market movers are doing. You can join the money making club.
Whether I am day trading a stock for a two hour hold period or position trading a stock for a multi month hold period, the clue that I always look for is abnormal behavior. Combined with good risk management, emotional control and some hard work, it is the key to making money in the market. Make abnormal market behavior the focus of your trading approach.
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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. WTSLA
I featured WTSLA a couple of months ago, but it is looking good again as it breaks from a trading range with abnormal behavior. Looks like the next stop is probably $6 with support at $3.20.
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2. ERS
ERS is breaking through long term resistance at $4.75 and is doing so with strong volume. The recent rising bottoms on the chart show optimism, looks good to go higher provided it can hold above $4.30.
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3. CXR
CXR demonstrates a very nice long term reversal pattern as the stock is now breaking through resistance from a period of optimistic rising bottoms. Good long term opportunity provided it can hold above support at $15.
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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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