Three Sources for Trading Opportunities
Stockscores.com Perspectives for the week ending September 4, 2006
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In this week's issue:
We trade the stock market to make money - that is obvious. But what is it that motivates our ability to make money? Understanding why stock prices change and how we can best anticipate that change is one key to being a good trader. The Stockscores Approach assumes that the market is usually efficient and therefore can not be beat, but seeks to take advantage of those times when market efficiency breaks down. These break downs are where we can expect to outperform the market.
Focus in on the break downs in market efficiency and you get in to the sweet spot of the market where an individual can beat the masses. These kinds of opportunities tend to come in one of three forms:
New information that is not yet publicly known
Irrational trading
Supply - demand imbalances
Let's first consider the spread of information. Market efficiency assumes that fundamental information moves from the company to the investment community in a fair and equitable way. All investors are supposed to get the information at the same time and stocks are supposed to move when significant fundamental change is announced.
Hopefully you are saying "yeah right" to this statement since most traders know this is not the case. The stock market is not fair; some investors get information before others and are able to act in the market with the advantage of that information.
When new information comes in to the market it tends to create abnormal trading activity. Stocks will break through support or resistance levels, make abnormal price moves and trade with abnormal volume. The market is the message, telling us that some investors are trading on new information. As more investors learn of the new fundamentals, money making trends will develop. The key is to take positions in these stocks as the trends are starting, before the efficiency of the market has priced in the opportunity. Taking advantage of information asymmetries is one way to beat the stock market.
When I do presentations to groups of investors I like to ask whether any of the audience has ever made an emotional trading decision. Everyone will smile sheepishly and nod, recognizing that we are often at the mercy of our emotions.
Market efficiency assumes we are all rational yet practical experience tells us otherwise. Savvy traders can take advantage of emotional investors by shorting stocks that go up on greed and buy stocks that go down on fear. Emotional investing happens every day and good traders know how to recognize and take advantage of it.
Finally, there are opportunities which arise out of one of the very basic rules of economics. If there is more demand than supply, prices go up. If there is more supply than demand, stock prices go down.
In theory, this is not supposed to happen. Stock prices are supposed to be based on the present value of the company's future earnings expectations. In reality, imbalances in supply and demand motivate price change. This creates an opportunity for investors who can see these imbalances coming. Consider what happens when shares held in escrow and unable to trade, become free trading. The stock price usually goes down because there is a large supply of stock that can be sold. Consider what happens when a company's stock is promoted, creating demand for the stock. Despite no fundamental change, a good stock promoter can move prices higher simply by attracting a wider audience for the company's story.
What I want to demonstrate is that the market is not always efficient and to make money you have to take advantage when market efficiency breaks down. It means going against the crowd mentality. It means looking beyond publicly available information and recognizing that the stock market is not fair. It means anticipating changes in the supply and demand for a stock.
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This week I applied the Stockscores Simple Strategy to the entire market, seeking stocks that were showing abnormal trading activity from predictive chart patterns. I like to see breakouts from periods of low price volatility, through resistance and with patterns that indicate the buyers are in control of the market. After scanning the Nasdaq, TSX and TSX Venture markets, I found two charts that I like.Back To Top
1. V.SKE
V.SKE has been a very quiet stock but it erupted with volume and abnormal price gaisn on Friday, breaking through $0.40 resistance. If it can hold above $0.34 support, I think it has good potential to develop in to an upward trend from here.
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2. GILT
GILT has been trading under resistance at $8.50 four months and formed a reverse head and shoulder pattern building up toward that resistance level. The stock broke through that resistance on Friday with good volume support and out of a rising bottom pattern, indicating optimism. Support resides at $7.55.
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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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