What Is Wrong With This Picture?
Stockscores.com Perspectives for the week ending June 24, 2007
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In this week's issue:
As investors, our natural inclination is to seek out stocks that have good qualities. We look for reasons to buy the stocks we are considering and often forget to look for the negatives. Since there are thousands of stocks to consider and almost all of them can have some reason for buying them, it may be better to reverse how we approach the analysis of stocks. Looking for reasons not to buy a stock will emphasize a higher standard for the stocks you do buy and will help to improve your overall market performance.
Here is a list of common reasons I use to throw a stock out of consideration:
Too Much Volatility
Volatility is uncertainty. Virtually every good chart pattern that I use to find winners demonstrates a break out from low volatility. The narrower the range before the breakout, the more important the breakout becomes. If the stock's price is moving all over the place before it makes a break through resistance then there is a much greater chance that the breakout is false and will likely fall back. Ignore stocks that have a lot of price volatility before the break out.
Not Enough Reward for the Risk
A stock can go two ways, up or down, after you buy it. If the upside potential is not enough to justify the downside risk, then you should ignore the opportunity. I like stocks to have at least double the upside potential for the downside risk. That way, you don't have to be right even half of the time to make money, provided you are disciplined of course.
Lack of Optimism
Fundamentals do not matter. It is the perception of Fundamentals that matter. If investors are not showing some optimism about a company's prospects then it is likely that they are not paying any attention to the company's fundamentals. Look for rising bottoms on the chart as an indication that investors are optimistic, if there aren't any, leave the stock alone.
No Abnormal Behavior
The stock market is efficient most of the time. That means that you can not expect to consistently beat the stock market because all available information is priced in to the stock and your success at predicting new information can only be random. To beat the market, we have to look for break downs in market efficiency. I find that the best way to do this is look for abnormal behavior in the trading of a stock because it implies that there is significant new information playing a role in the stock's performance. I don't consider any stock that lacks abnormal behavior in its recent trading.
Too Far Up
The higher a stock goes, the riskier it becomes. I don't like to chase stocks higher. If I look at a 6 month chart of a stock and it has made more than two steps up, I don't consider it. A one day run of substantial gains is not a concern; I want to ignore stocks that have been in upward trends for some time. Look for stocks that are breaking from periods of sideways trading, not up trends.
Lack of Liquidity
The more often a stock trades, the easier it is to get in and out of it. Stocks that are not actively traded tend to have wider spreads between their bids and asks and it can be difficult to move in and out of the stock. Don't consider stocks that don't trade every day and they should trade at least 50 times a day but more is better.
Mixed Messages
I always try to look at a stock's chart on more than one time frame. If the message is not the same on both charts, I leave them alone. When day trading, look at the daily and intraday charts. When position trading, look at the daily and weekly charts.
Any time you think a stock has great potential, give this list a look and see if any of these factors show up. If so, it may be a good idea to move on and look for something else.
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For this week's strategy, I sought out stocks that traded with abnormal moves to the upside with abnormal volume. I inspected each chart to see if the stocks were starting their up trends (and not already well in to them), breaking through resistance and breaking out of a period of sideways trading that had rising bottoms, an indication of optimism.
Here are a couple of stocks that I found that look like they are worth considering:
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1. PGIC
PGIC has been basing since early April and slowly showing optimism as each downward move is less intense than the one before. The stock started to trade abnormal volume late in the day on Friday and that makes me think something is going on that we don't yet know about. With support at $5.10 and resistance at $9, the stock has a good risk reward ratio.
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2. ELSE
This stock has a history of moving quickly, likely because it is not widely held and has a lower number of shares in the public's hands. On Friday it broke through resistance with abnormal volume. The rising bottoms show me that the buyers are in control of this stock and Friday's abnormal activity tells me that the buyers are excited about something. Support at $5.50.
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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.
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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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