Longer Term Trading
Stockscores.com Perspectives for the week ending April 29, 2007
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This week, Stockscores Pro members will have exclusive access to an online video presentation outlining the research process for long term position trades.
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In this week's issue:
My recent commentaries and stock picks have been geared more toward shorter term trading. Primarily, this has been because the slower priced speculative stocks have been hot and they tend to enjoy quick moves up and often retrace just as quickly. That makes it necessary to trade them actively and hold periods are typically a couple of months or less.
But this sort of active trading is not for everyone. If you are an investor who is looking for longer term trading opportunities then this week's commentary is for you.
To begin, let's review the chart characteristics of what makes a good buying opportunity:
break through resistance
break from sideways price movement
break from optimism
break with abnormal price and volume action
a risk reward ratio of at least 1 to 2
(a full review of these criteria is available on the StockSchool video, "Understanding Chart Patterns" which can be purchased and watched in the Products area of Stockscores.com)
These criteria hold whether you are day trading to hold for the next 2 hours or position trading to hold for the next year. The difference is in how these rules are applied.
As a general rule, the longer the time frame you want to hold for, the longer the time frame you should apply the rules. Therefore, if you are looking for a long term position trade then you need to adjust the rules as follows:
break through two year resistance
break from sideways trading of at least 4 months
break from optimism
break with abnormal price and volume action
a risk reward ratio of at least 1 to 2
sector confirmation
The last point is new; a long term upward trend in a stock will require that the stock's sector is also strong. You can use the Stockscores Sector Watch tool to inspect the chart of the appropriate sector once you find a stock that you think looks good.
I find it easiest to look at 2 year charts when reviewing my Market Scan results and I prefer charts that have not ever traded at higher prices as this ensures there is no limit to the trade's reward potential. However, some turn around chart patterns can be worth considering too provided they have the requisite abnormal activity and strong chart pattern.
Probably the most important thing to remember is that you have to get rid of the dogs early and hold the winners until there is a sell signal. When you enter the trade, identify support and plan to exit the trade on a close below support. When a stock goes in to an upward move, allow for short term pull backs so that you can ride out the long term trend, only exit when you get a strong exit signal. Stop losses and let profits run.
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I have found that almost all long term upward trends start with abnormal activity. Abnormal price gains with abnormal trading volumes are common traits of the initiation of sustained price gains so it makes sense to look for these two things when looking for good longer term trading opportunities.
The problem is that not all instances of abnormal activity lead to up trends. It is important to rule out the marginal opportunities by using chart pattern recognition to find the stocks with the best potential to go in to those money making trends.
Ideally, we want a stock that has been going sideways for some time but has recently shown optimism in the form of rising bottoms on the stock chart.
I did a very simple Market Scan this weekend, looking for stocks that had abnormal price gains with abnormal volume on Friday. I added in a liquidity requirement of at least 100 trades and found 90 candidates. Of the 90, most did not have the sort of pattern I like to see but there were a few stocks that stood out. Consider these for longer term position trades:
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1. MFE
MFE is breaking out of an ascending triangle pattern that has been building for almost seven years. Volume was strong on Friday and although the stock failed to close near its high of the day I still think it has good potential to move higher in the months to come. Support at $28.95.
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2. MEE
The daily chart of MEE is breaking out a lengthy pennant pattern and has broken a long term downward trend line on the weekly chart, I think it may be starting a turnaround here. Support just below $24 and upside potential to about $38.
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3. T.POU
T.POU has been in a down trend since April 2006 but broke the downward trend line this week with a strong move to the upside on very strong volume. We may see it pull back in the short term as downtrends usually take some time to fully reverse but I like the stock so long as it can hold above $20. The main challenge for the stock will be to overcome resistance at $30 and then $35.
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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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