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Stockscores Trading Club - Toronto
The Toronto Stockscores Trading club will be meeting on April 29th at 7:00 pm at:
Humber College
203 Humber College Blvd
Guelph Humber 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 23, 2004
In this week's issue:
Do you think you judge information differently, based on your state of mind? A person in a bad mood who receives good news will likely react differently than a happy person receiving the same information. How we judge information is dependant upon our mood, and since the stock market is a collective of individuals judging information, understanding the mood of the market is important to predicting stock price change.
In the late 1990's and in to the first quarter of 2000, the market was in a very good mood. Federal Reserve Chairman Alan Greenspan characterized it as "irrational exuberance" in a speech he delivered. The effect of this extreme optimism about stocks was that company fundamentals were awarded a very high valuation. Stocks traded at astronomical multiples to company earnings, because investors were enjoying strong stock market gains and were willing to pay more. Everyone was having a party.
Ultimately, the bubble of exuberance burst, and stocks tumbled lower. Three years later, the market was gripped in an extremely bearish stock market, where investors were very unhappy with their returns. Many stock market participants became so fed up that they opted out of the stock market, choosing real estate and other investment vehicles instead. Pessimism was at an all time high.
In the strictest theoretical sense, stock price is based on the ability of a company to make money in the future. This means that information about the company's business and its ability to make money defines what stock price will be. However, while most theorists argue that company fundamentals drive stock price, I will assert that it is only the perception of fundamentals that matter.
Since our perceptions are shaped by our psychology, our perception of company fundamentals is dependant both on information about the company and by the state of the market's collective mind. How the market judges fundamentals will depend on the mood of the market.
Simply put, the market can either be optimistic or pessimistic about a stock, a business sector or the market in general. Successful traders will tend to buy optimistic stocks, and sell pessimistic stocks. By doing the same, you can put one more factor in your favor.
Think of the market's mood as a river. A stock is like a canoe on the river, and its future price direction is determined by how strong the company can paddle. Even a good company that paddles hard will have a difficult time if it is working against the current. It will always be easier to paddle with the current, and we as investors should do the same.
Optimism and pessimism are easy to see on a stock chart, simply by drawing some lines. Look at the bottoms on a stock chart, the lower boundaries of price troughs. If they are rising over time, the market is optimistic. Pessimism exists when the tops, price peaks, are falling. Rising bottoms are optimism, falling tops are pessimism.
The Stockscores can also be used to determine whether the market is optimistic or pessimistic. A Sentiment Stockscore of 60 or better generally means that investors are Optimistic. If the Sentiment Stockscore is less than 60, investors are likely pessimistic. I tend to only buy stocks that have a Sentiment Stockscore of 60 or higher.
Utilizing optimism, pessimism and the Stockscores in your trading will help you improve your market performance. The StockSchool Pro home study training course goes in to greater detail about these important concepts, and shows specific strategies that you can use to identify good trading opportunities. See the Educational Products area of Stockscores.com for more information.
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I am often asked how to play stocks that make big breakouts. Breakouts are a strong sign of investor optimism, and often come when there is significant fundamental change in the company. However, a breakout also means that the stock has gone up an abnormally high amount in one day, and can be followed by a short period of profit taking.
I have found that stocks that make very strong breakouts are more likely to pull back before they make a move to the upside. My strategy for playing stocks like these is to wait for the pull back, and enter on the first day that the stock closes above its open (green candle) after some days where the stock closes below its open (red candle).
This past week, I featured a stock in our member's newsletter that fit this category. It made a strong breakout on Monday, pulled back Tuesday, stabilized and closed above its open on Wednesday, and rocketed higher Friday morning. A perfect example of a swing trade set up to play the post breakout pull back.
The chart is shown below:Back To Top
1. ESLR
Notice the very abnormal activity on Monday, and then the much shorter green candle on Wednesday. That was a sign that the stock was stable, but that the excitement that showed Monday was still valid. Friday morning, the stock traded as high as $5, and a swing trade sell signal was generated at about $4, representing an approximately 30% gain in two days. This kind of trade is easily found using the Stockscores Simple Market Scan, available to our members who have completed the Stockschool training course.
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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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