Things to Look For
Stockscores.com Perspectives for the week ending December 8, 2006
|
| Upcoming Events |
Stockscores Seminar Online
Watch the Stockscores Seminar online by clicking here
|
|
In this week's issue:
There are a lot of things to consider when buying stocks. Since we are making our Christmas shopping lists, here is a list of things to look for in the stocks you are considering for your portfolio.
Breakdown of Market Efficiency
Most people, most of the time can not beat the stock market. The stock market is efficient at pricing in the fundamentals so success for most traders is random. Those who outperform the overall market do so by seeking opportunities where the efficiency of the stock market is breaking down.
Market efficiency can break down in two ways. First, some investors can be trading on information that the general public does not know about and therefore have an advantage in predicting future price movement.
Second, investors can be trading with emotion which affects their judgement of the stock, causing the market price to be too low or high for what the stock is really worth.
Both of these breakdowns create opportunity. Where you see evidence of new information or emotion affecting price there may exist an opportunity. Abnormal price and volume activity is often the evidence of new information and price volatility is often a sign of emotion.
Worthwhile Risk: Reward Ratio
A good trading opportunity is not being able to predict the stock is likely to go higher. Good trading opportunities come when the upside potential is better than the downside risk. We are never going to be right all of the time so we must learn to trade opportunities where the cost of being wrong is at least half of the reward for being right.
High Probability Chart Pattern
We may see breakdowns in market efficiency but this only becomes effective in picking stocks if we identify a high probability chart pattern that improves our potential for profit. Patterns like ascending triangles, pennants and flags are predictive, particularly when coupled with the abnormal activity component that is at the core of the Stockscores Approach.
Good Liquidity
Liquidity is a measure of how actively the stock is traded. The more shares that trade, the more times the stock trades, the more opinions are being cast in the market. It is easier, and cheaper, to go in and get out of a stock that is actively traded. The picture painted by the market in the form of a stock chart is more reliable when the stock is more actively traded.
Inner Strength
Your greatest enemy as a trader is yourself. Without the ability to be disciplined and follow a trading plan, most traders will fail even if they are very good at picking the right stocks. When you are considering a trade, make sure you make a plan and have the emotional control to follow the plan. If you don't, stay out of the market.
Back To Top
Bottom fishing is the quest for stocks that are inexpensive relative to previous levels, but show signs that the bargain is going to end soon. We want to look for stocks that are a showing a break from pessimism, an increased level of confidence that the stock is undervalued, and signs of optimism for the future. Filtering for these situations gives the investor a short list of companies to perform their necessary due diligence on before speculating on a change in trend.
Buying a stock that is in a long standing down trend can be as dangerous as stepping in front of a freight train. It takes time for stocks to reverse trends, and buying what seems to be a bargain can be a crush to your portfolio. However, bargain hunting can be profitable if the timing is right. To effectively bottom fish beat-up stocks, you have to enter when there are signs that the downslide is slowing and a move back upward is imminent.
Market psychology takes time to reverse. When bottom fishing, we want to focus on stocks that have suffered a sell off and are cheap relative to where they once were. However, we want to also look for signs that market psychology is turning favorable on these stocks and that they are ready to head higher again.
This strategy focuses on three stages:
Stage 1 - a break from the show of pessimism
Stage 2 - a show of confidence
Stage 3 - a show of optimism
Stage 1 is essentially a breaking of the downtrend. If we draw a line along the top of the declining trend, we have defined the downtrend. A break of the trend arises when the stock can break upward and through that declining trend.
In Stage 2, we want to see signs that there is confidence in the break from pessimism. The market needs to show resilience that the downtrend is indeed slowing, and that the potential for an up trend is real. A consolidation following the break is a good show of this, and is more significant if it as at a level higher than the previous low. This is a rising bottom.
Finally, we want to find signs that there is optimism about the future of the stock. A breakout from a rising bottom is Stage 3.
Back To Top
1. USGL
USGL is breaking from an optimistic rising bottom chart pattern with very strong volume supporting the breakout. Support is at $4.95 and the next level of resistance is at $7.50 so that sets up a risk reward ratio of about 1 to 4. The trade is a bust if the stock closes below $4.95.
Back To Top
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.
Back To Top
|
If you wish to unsubscribe from the Stockscores Perspectives Weekend Edition or change the format of email you are receiving please login to your Stockscores account. Copyright 2006 Market Perspectives Inc.
|
|
