The Catalyst
Stockscores.com Perspectives for the week ending June 15, 2007
In this week's issue:
Big things start small, but with a well defined catalyst. Consider:
November 10, 2001 - a struggling Apple Computer ships the first iPod digital music player. As of April 2007 the company has sold over 100 million iPods and have enjoyed phenomenal growth in other areas of their business.
June 1914 - Austrian Arch Duke Franz Ferdinand is assassinated in Sarajevo and Serbia refused to extradite the killer, causing Austria to mobilize forces against the country. World War 1 begins, an event which would ultimately see 15 million people die as a result.
August 10, 1897 - Felix Hoffman first synthesizes ASA in a medically useful form which Bayer markets as Aspirin, still a popular form of pain relief today. Eleven days later Hoffman also invents Heroin.
Stock market trends also start with an important catalyst:
April 16, 2007 - AMZN stock makes a statistically significant price gain on statistically abnormal trading volume. On April 24th the company announces better than expected earning. Since the abnormal activity on April 16th the stock has gained 60%.
Whether we are talking stocks, consumer products, politics or inventions, the idea is the same. Each starts with a spark and grows in to something much more significant. It is an abnormal occurrence that serves as the catalyst for change. Like a ripple cast by a stone thrown in to a pool, the effect becomes larger over time. One small stone can make a very big circle.
What was it about AMZN that told us the stock was likely to go in to an upward trend? The abnormal activity was important but if you bought every stock that recorded an abnormal price gain with abnormal volume I don't think you could expect to make money.
Imagine that you throw two rocks in to water. One in to an ocean that is being whipped up by a wind storm. What sort of ripples are made? Probably nothing that you can notice. Throw your other rock in to a calm swimming pool and you will see each well defined ripple move outward from the epicenter.
The difference in these two examples is how the ripples are affected by the calmness of the water; a ripple is more noticeable when there are not a lot of waves. In the same way, a day of abnormal activity in a market where price action is calm will have a very different result than abnormal action on a stock that has been trending for some time or is moving with a good deal of price volatility. To find good opportunities, we not only have to look for abnormal activity but also consider the price volatility of the stock leading in to the abnormal activity.
This is where an ability to read chart patterns is helpful. Abnormal activity that is breaking from a good chart pattern on a stock that is not already well in to an upward trend is what we want. Here are some more examples:
JSDA - Abnormal price and volume action from a good chart pattern on Dec 22nd
POT, T.POT - abnormal price and volume action from a good chart pattern on July 27th
RIMM, T.RIM - abnormal price and volume action on Aug 10 and again on Sept 29th
Take a look at these charts and notice the trends that came after these catalyst days. Then go look at other stocks that you know have done well over the last year and see if you can find the abnormal activity that served as a catalyst for price change over time.
The Stockscores Approach and the tools of Stockscores.com are based on this idea. You can learn more about how to trade this strategy from the StockSchool Pro course.
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For this week's strategy, I did a scan for stocks that were having an Abnormal Day up with Abnormal Volume and at least 500 trades. This gave me a list of 76 charts which I inspected to find those that were not already well in to an up trend but were breaking through some resistance from low price volatility. Here are a couple that stood out and are worth considering:Back To Top
1. HANS
HANS has been trading under resistance at $40 for some time but broke through that price point today with very strong volume. Support resides at about $38.50.
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2. COOL
COOL is breaking out of a pennant pattern that has been building over the past four months. Volume on the break is abnormal as is the price action giving the signal that something has investors suddenly excited about the company. Support at $1.50.
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References
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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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