| Thank-you Toronto |
I would like to thank those who attended our course in Toronto for helping make it a success. The course was a sell out and I enjoyed teaching a very nice group of people.
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Stockscores.com Perspectives
For the week ending February 13, 2004
In this week's issue:
It is a scary world inside my head. If you could cut through the thick skull and navigate the cobwebs, you would still be left with a slanted, cynical view on the world. However, it seems there are a few people who want to know my thought process when evaluating a stock, so I thought I would go through some of the things that I think about when seeking opportunities. While it seems somewhat self indulgent, I hope it helps some of you to understand the thought process of a trade.
To begin, the thing that I look for more than anything are good chart patterns. I have been trading a long time, and considered a multitude of technical analysis indicators in my pursuit of the market's holy grail. Over that time one thing has become clear to me; there is no better way to predict a stock's price action than chart patterns.
The problem is that chart patterns are hard to define mathematically. A trained eye can pick them out of a chart easily, but having a computer automate the search is difficult. That is why I created the Stockscores. By taking the common themes of good chart patterns and putting them in to a scoring model, I can find good chart patterns by finding stocks with good Stockscores.
I often stress that I never buy a stock because it has good Stockscores. The Stockscores are a tool that makes the search for market opportunities easier but I only buy stocks because they have good chart patterns.
When I look at a chart, the think that I am really looking for in a good chart pattern is a break from low price volatility. Price volatility is an indication of uncertainty; the more volatile a stock is, the more unsure the market is about a company's value. Stocks that are trading in narrow, sideways trading range are demonstrating confidence among investors that the price is right. That makes breakouts from low price volatility more significant.
A stock breaking from low price volatility implies to me that some investors in that stock are trading on new fundamentals, and I find that the general market does not usually know what those new fundamentals are. By following breakouts, we are really following well informed investors who are trading on tomorrows improving fundamentals, rather than that which is already known and already fully discounted in to a stock.
Once I have found a stock that is breaking from low price volatility, I then look to see if there will be price resistance above where I am purchasing the stock. If I can see that some investors own the stock at higher prices, I should expect that they will be eager to sell the stock when it gets back to their entry point, where they can break even. It is typical of investors who have been losing money for some time to just want to get out of the stock without a loss. If there are ceiling prices above what I am going to buy the stock at, I expect that this ceiling will limit my upside. If I look at a stock that has limited upside potential because of resistance, I will likely not purchase the stock even if it has a good pattern.
Ideally, I want to purchase a stock that has no resistance on the stock chart, and is breaking from a period of low volatility. If that occurs, then the next thing that I think about is the probability that the stock will suffer a pull back after the breakout. It is common for stocks to pull back for a few days after a breakout, but one way to decrease the chance of that happening is to look at an intraday chart to see how stable to stock was before the breakout. If the stock was rallying strong in to the close, it is more likely to pull back over the next few days. A stock that was strong in the morning on a breakout day and then trades sideways in the afternoon, near the high of the day, has less chance of that short term pullback.
Assuming I am now satisfied with my entry decision on a stock, I must now decide where the market will prove me wrong. Any time I buy a stock, I plan to lose. I want to know in advance when I will sell at a loss if the market proves me wrong. If it gets to that floor price, I sell and take the small loss. Small losses are the sign of a good trader. Big losses are the sign of an amateur who has a fear of losing.
Many traders will set a price target when they buy a stock, but that is not something I believe in. I think we should sell stocks when they appear more likely to go lower than higher, but I never want to limit upside by selling stocks at a price target. Limit downside, don't limit upside.
There you have it, a journey through my thought process when evaluating a buy opportunity. In consideration of the multitude of evaluation methods and indicators available, it may seem hard to believe that this is all I do. However, I have made a lot of money in the market by keeping things simple. I hope this helps you do the same.
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This week I ran my favorite Stockscores Market Scan, the Stockscores Simple. This strategy seeks out stocks that have good Stockscores, and potentially good chart patterns. By inspecting the charts that his scan produces, we can see if there are stocks that have good potential to go higher.
I ran this Market Scan on the Nasdaq market this week, and it produced 35 candidates. Of the 35, I liked one in particular.Back To Top
1. CPST
The Nasdaq market has been quieting lately, but this was one stock that showed a good chart pattern today. It is breaking through long term resistance at $2.50 today with very good volume support, and looks like it has good potential to go higher. If the stock closes below $2.20, I would consider this a good chart that did not work out, and take a loss. However, this chart tells me that this stock can go in to an up trend from here.
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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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