Making a Check List
Stockscores.com Perspectives for the week ending November 3, 2007
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In this week's issue:
With the passing of Halloween we are now in to the Christmas shopping season, a time when crazed shoppers prepare their lists of the things to buy and the people to remember. Even Santa has a song about the Christmas list, you know, the one that he checks twice? The question is, do you as an investor have a check list?
If not then now is the time to make one. Having a check list of requirements for investment in a stock is essential for it will help you to maintain a rational approach when analyzing stocks. Here is a list of things to consider adding to your check list:
1. Are the buyers in control?
You don't want to be buying stocks that the market is pessimistic on for doing so is no more fun than trying to ski up a hill. If the tops are falling, the sellers are in control. If the bottoms are rising, the buyers are in control.
2. Is the stock showing signs that it is an Alpha stock?
Alpha stocks are moving on their own story and will have less correlation to the overall market. If you want to beat the market, you need Alpha. The easiest way to find Alpha stocks is look for abnormal trading volumes with price movement to the upside.
3. Is the stock breaking through a ceiling price?
If there are new fundamentals attracting the attention of the investors who know the most about the company, their will be a willingness to pay more for the stock and send it through price resistance levels.
4. Has the stock been trending sideways for some time?
We want to buy stocks that are starting trends, not well in to them. Stocks that have been going up for a while have risk because the market expects good results from them. Getting in early in a trend reduces risk because expectations have not been built up too much yet.
5. Does the stock have enough reward potential to compensate for the risk?
Look at the stock chart and find the most recent price floor. Plan to sell the stock if it falls through that floor. Then look for the major price ceiling that the stock has found in the past. That is resistance and is the place where the stock will likely get stuck on the way up. Now, the distance from where you are buying to resistance should be twice the distance down to support. That is a 1 to 2 risk reward ratio and is the minimum for my preferred strategies.
6. Is there a future supply of stock that will limit upside potential?
This is more important when trading micro or small cap stocks, but it is important to understand if shares issued from recent financings will become free trading and when. When a company issues new shares to raise money, those shares usually have an escrow period during which they can not be traded. There is a potential for a strong supply of stock when those shares come to be free trading so check to see if there are a release of shares coming, you don't want to hold stocks that are in this situation.
7. Check the number of shares that are free trading
This is also more important for the micro and small cap stocks because their price movements are often based on the promotion of a short term story. If there are a lot of free trading shares in the market then there is a greater potential for future selling pressure. Up trends need volume and an upward movement is easier if there are fewer shares for people to sell.
8. Is the market optimistic?
While we try to remove the market factor by seeking out Alpha stocks, all stocks will still have some correlation to the overall market. Making money buying stocks is always going to be easier if there is a bull market. Focus your investments on the sectors of the market that are strong; it adds another dimension that helps your stock picks perform.
9. Is the stock liquid?
Liquidity refers to how often the stock trades. The more liquid a stock is, the easier and cheaper it is to move in and out of the stock. Stocks that trade only occasionally will be difficult to buy and sell and it may be expensive to do so if there is a wide spread between the bid and the ask.
10. Are you emotional?
Always check your own emotions before entering a stock. If your judgment is influence by emotion you can almost guarantee that you will make some mistakes. Trading to feel good or avoid pain is never a good idea, so learn to understand your motivations for a trade and avoid those that are attached to emotion. The best traders are the ones that don't care.
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This week I scanned using the Stockscores Market Scan for stocks making abnormal price gains on abnormal volume with a minimum number of trades of 100 and a Sentiment Stockscore of at least 50. Here are a couple of charts from the scan results that I like.Back To Top
1. BKC
BKC is breaking out of a short term cup and handle pattern and I think has good potential to go to $32.50. Abnormal volume and abnormal price action on Friday tell me the market has found something to get excited about, I think it is good so long as it can hold support at $25.30.
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References
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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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