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Stockscores.com Perspectives
For the week ending February 1, 2004
In this week's issue:
If you have followed this newsletter for a while, you will probably know that I often wait for stocks to break out of trading ranges before buying or short selling them. Many have asked me, "Why wait for a stock to go higher before buying, or wait for it to go lower before short selling?' It is a good question, since it would seem that buying a good stock at a lower price would be smarter. Short selling a stock that is destined to go lower at the highest price possible also seems smart. However, this is not the case.
Breakouts give us a message. They tell us that investors have found some fundamental factor that warrants paying more for the stock, or accepting less. Remember that the stock market is a discounting mechanism. Through the process of buying and selling, investors are casting their vote on what they think that the stock is worth. When stocks go in to trading ranges, the market is essentially telling us that it has come to consensus on what the company is worth.
That trading range is bounded by upper and lower limits. Based on all the fundamentals that the market has to judge a company's value, the upper boundary represents the most that investors are willing to pay, and the lower boundary is the minimum that investors are willing to sell at. The upper boundary is resistance, and the lower boundary is support.
When the market takes a stock through resistance, it may be telling us that there are new fundamentals that warrant a higher price. A stock moving down below support may be indicating that there are new fundamentals which warrant selling at a lower price. Since the spread of information from the company to the investor is rarely an equitable process, stocks tend to move in anticipation of the public announcement of new fundamentals. The stock market is not fair, and some investors are able to trade on privileged information.
The reason I buy breakouts is because I trust that some investors are trading on new information that, when fully public, will take the stock higher. I am trying to ride the coat tails of the well informed investor, but still staying ahead of the public.
It is important to qualify breakouts by only trading those that are breaking from low volatility. We want to focus on the high probability trades, and those exist when stocks break from narrow trading ranges where the market has a strong consensus on what the company is worth.
This explains why it is better to pay more for a stock, or short sell at lower prices. The breakout tells us that there is a good trade, and increases the probability of success. Unless we have access to inside information, we can not predict breakouts, only listen to their message.Back To Top
I scanned the entire market in a number of different ways this weekend, and could not find any stocks that I thought looked like they were worth buying. The market has been uncertain this past week, and we may see some further weakness as investors take profits from the ten month up trend that we have enjoyed.
With that in mind, I turned to my Short Term Breakdowns Market Scan which seeks stocks that are breaking through support levels and have a good potential to go lower. These are short selling opportunities, which should do well if the market does in fact give back some of the gains it has made recently.
The Market Scan identified 29 candidates, of which three stood out. Here are some short selling candidates for your consideration.Back To Top
1. MNC
MNC has been doing very well since March, but it broke through short term support on Friday and violated its upward trend line. It looks like optimism is beginning to take over, and we could see a pull back to the next level of support around $18. If the stock is able to rebound back above resistance at $25, I would consider this a failed trade.
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2. UPS
UPS is breaking through the neckline of a head and shoulders topping pattern, indicating the market is worried about lower prices ahead. The next level of support is $65, and I think this stock has good potential to move down to that price point in the weeks to come. A move above $73.50 would make this a failed trade.
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3. CXW
CXW has been in a good up trend, but broke its upward trend line on Friday. I think the stock will move in to a two or three week pullback and perhaps come back to the $25 price level. Resistance is at $30; if the stock comes back to close above $30 I would cover the short and take the loss.
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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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