Abnormal Activity Leads the Way
Stockscores.com Perspectives for the week ending October 6, 2006
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In this week's issue:
At the core of the Stockscores Approach is the idea that abnormal market activity tells us a lot about the future direction of stocks. Often, new and significant fundamental information is the reason for stocks trading with more price volatility and trading volume than normal. If we look for abnormal activity and apply basic chart reading and risk management skills we can find market beating trading opportunities.
The Stockscores Market Scan has two important filters that help us to do this. The Abnormal Activity and Abnormal Volume filters seek out stocks that are trading with statistical significance in each of these areas. A simple strategy is to look for stocks that have both of these criteria and have a predictive chart pattern.
This strategy really supports our belief that the stock market is not fair. Some people have better access to information than others and when they act on that better information they can enjoy greater profits than the general public. A good example of this came early this week when Gilead Sciences (GILD) announced that they were buying the Myogen (MYOG) for $2.5 Billion. Myogen shares went up about 50% on the news.
What is interesting is how abnormal the shares traded in the weeks leading up to the news. One of the strategies of the Stockscores Approach, the Breaking Downtrends strategy, identified this stock two months before the news came out:
MYOG met the criteria of the Breaking Downtrends strategy at point 1 on the chart above. On that day, the stock made a statistically significant gain with significant volume, breaking the downward trend line. At point 2, the stock broke from a pennant pattern, confirming the initial buy signal. Point 3 was another confirming signal as the stock broke through another level of short term resistance.
Notice how the two basic rules of the Stockscores Approach are satisfied well before the news of the takeover came out. The Sentiment Stockscore moved above 60 and the Signal Stockscore made a number of spikes above 80, alerting traders that something was going on with the stock. Finally, the stock made the big price gap at point 4 when the news of the take over was made public.
This example really shows how some people begin to trade on new information before it is made public. It is difficult to otherwise explain the quick change in the chart and increase in trading volume. Those closest to the company knew something was in the works and acted in the market, creating the abnormal trading activity. At least, that is our hypothesis which is confirmed when looking at the market activity for this stock.
Not all abnormal activity is worth taking a position on. It is important to know what makes a chart pattern predictive and to understand the risk reward trade off necessary to assess a trading opportunity. Also, not all trade set ups will culminate in a one day gain of 50%. However, if you look at a lot of stocks that are in well defined trends you will see over and over again how abnormal trading activity started the strong directional move that makes up a price trend.
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This week I take the concept discussed above and use it identify some position trading opportunities.Back To Top
1. CTTY
CTTY had a very abnormal trading day on Friday and broke its long term downward trend line. With the strong gains on Friday I would not be surprised if the stock has a short pull back period before continuing to work higher, but I like the stock so long as it does not pull back through support at $3.
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2. INFS
INFS is breaking out from a basing pattern after the longer term downward trend was broken in July. The volume on Friday was higher than it has been for some time and the stock managed to close near its high of the day on Friday. Provided the stock can hold support at $2.65 I think it has good potential to get back toward $3.75 - $4.
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3. SIFY
SIFY is making a bottom fishing chart pattern as it breaks from a rising bottom consolidation with abnormal price and volume action. Support at $8.90 needs to hold or the positive signal today is voided.
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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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