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Toronto Stock Trading Club
The Toronto Stockscores Trading club will be meeting on April 29th at 7:00 pm at:
Humber College
203 Humber College Blvd
Guelph Hunter Building
Romm GH122 Ground Floor
Enter in driveway A and park in Lot 3
I will not be present at this meeting this time, but hope to come in the future. There is a good group of traders in the Toronto area, and hopefully many of you can get together at these meetings to share trading ideas.
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Stockscores.com Perspectives
For the week ending April 9, 2004
In this week's issue:
There is a fairly predictable cycle that stocks go through. Where a person enters the cycle makes the difference between successful investors and those who fail to profit. An investor's emotional reaction to the cycle can be even more important.
Cycles begin with a period of consolidation, when the stock trades sideways with not a lot of interest from investors. When signficant fundmental change catches the interest of those who follow the company closely, there will tend to be a break from this consolidation. This break is often followed by a short pull back where uninformed investors second guess the strength and sell in to it. Typically, the post breakout pull back is relatively short, for as news of the significant fundmental change becomes more widely known, more investors show a willingness to buy the stock, and it can start to go up.
With an improving business, and a market that is interested, the stock can surge higher until it gets to a point where shorter term investors want to take profit. This profit taking phase often causes another, more substantial pull back, but does not necessarily mark the end of the uptrend. As the sellers finish their work, the stock stabilizes and goes back in to its up trend.
Eventually, the up trend gets over extended as euphoric investors buy on emotion, and pay more than what the company is worth. Strong volume and a steep up trend signal this topping out phase. A quick and sharp pull back is followed by a weak move back upward as investors caught up in the company's story try to buy the stock cheap. They are buying in to a sucker rally, as the stock fails to make a new high and instead shows signs of longer term weakness. The stock breaks support levels, and moves from an up trend in to a down trend.
As the stock falls, investors recall the strong fundamentals of the past, and still buy while the smart money takes their profits. Soon, the pace of the fall lower increases, as investors begin to sell on fear rather than rational thought. Eventually, fear causes the stock to go too low, and savvy traders work to accumulate the stock cheap in anticipation of the next cycle.
Understanding this cycle is important for knowing how to play the process. Losing investors may hold the stock during the initial consolidation phase, but then sell on the break thinking that they are fortunate to see higher prices. The winning trader is buying the breakout as it is a signal of improving fundamentals.
A losing trader may get shaken out of the stock on the pullback, thinking that there is something wrong. The winning trader knows that the pull back, provided the stock does not go below support, is a normal reaction in the market cycle. They hang on.
When the stock bounces back and begins to go in to a strong up trend, the losing trader believes that the rally is not destined to last, and fails to enter the stock in its early stages. As the stock rises, however, the cynical loser begins to become a believer again. As the stock goes up and up, the losing trader feels a sense of loss for having not held on to the stock, or bought it sooner. This feeling culminates in the purchase of the stock near the high of the first leg of the uptrend. They buy right before the first profit taking pull back.
The pull back brings back fear to the losing trader, and they quickly sell with the concern that the stock is going to head lower. Shortly after they sell, the stock ramps up again, and the emotional rollercoaster takes hold yet again. The losing trader may again buy in to strength, since they associate up ticks in the stock with a quality company. When the stock tops out this time, they decide to hang on. After all, on each previous pull back, selling was a mistake.
This time, however, the pull back is a real sign of a turning trend. The upward move is running out of power, and the stock is destined to go in to a downward trend now that the market has more than priced in the new fundamentals. However, the losing trader hangs on, believing in the fundamentals of the past, rather than taking a forward look at the company's business prospects. The loser fails to set a loss limit, and decides to hang on no matter what. After all, they have bought a good company.
Eventually, the downtrend picks up momentum, and brings fear in to the heart of the losing trader. They sell in a panic, taking a big loss and resolving to never be undisciplined again.
Have you ever ridden the cycle, one step behind the smart money. Most investors have as emotion took a tight grip on their decision making. It is hard not to fall in the these traps, but if successful trading requires that you stay ahead of the curve, and the crowd.Back To Top
Price volatility is an indication of uncertainty. Investors have confidence about what the company is worth when the stock does not trade with a lot of volatility. An increase in price volatility is an indication that something has caught investors interest.
That is why breaks from low volatility are important. If well informed investors suspect that signficant fundamental change is coming, then they will be motivated to buy or sell stocks out side the range of low price volatility.
This week, I used the Stockscores.com Market Scan to seek out stocks that are breaking from low volatility with more volume than normal, to identify potential opportunities. From the results of the Market Scan, I found three stocks that I think have good potential.Back To Top
1. POWI
After a lengthy downtrend, POWI is now breaking from a basing period. The increase in volume and the gap up in price indicates that investors have some excitment about this stock, and we could see it reverse the downtrend from here.
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2. VCLK
The longer term chart of VLCK had resistance at $12, but the stock broke through that price level with strong volume on Thursday. The stock may not make a smooth run higher, but it does have good potential to make gains in the weeks to come.
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3. LOOK
LOOK was looking pretty quiet last week, until a spike up in volume and a break from low price volatility on Thursday. The stock may stall at short term resistance of $2.30, but it has good potential to see higher prices in the weeks to come.
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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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