Watch For Confirming Chart Signals
Stockscores.com Perspectives for the week ending September 25, 2004
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In this week's issue:
Most people that look at stock charts when making investment decisions look at only one. If they are a position trader, they look at a daily chart. If they are a day trader, they look at a two minute chart. However, looking at the multiple stock charts for the same stock can improve the success rate or your stock picks.
I think that we should always look at three time frames for each stock we are considering, plus a chart of the overall market index. By doing so, we can see what different groups of investors are thinking, and make a trading decision that fits with the opinions of more than one group.
For example, I typically look at a six month daily chart on Stockscores if I want to identify a stock that is worth considering for a position trade, which has an expected hold period of three days to three months. Looking at this chart, I can get a good read of what most individual investors believe about the stock.
However, if I expand my research to also look at a 1 or 2 year chart, and an intraday chart, I can also see what longer term fund investors are thinking, and what short term day traders believe.
Ideally, I want to have all of these groups of market participants on my side. When buying a stock as a position trade, my chances for success will be better if I can determine if the large funds are also buying, and they tend to analyze longer term charts. I will also be better off if short term day and swing traders are also showing optimism.
Here are some guidelines for the time frame of charts that I look at when making a trading decision:
Position Trade (3 day to 3 month hold period) - 2 year weekly or daily chart, 6 month daily chart, intraday 5 or 15 minute chart.
Swing Trade (1 to 10 day hold period) - 6 month daily chart, 15 day 30 minute chart and 3 day 5 minute chart.
Day Trade (less than a day hold period) - 1 month daily chart, 3 day 5 minute chart and 2 day 2 minute chart.
When considering the charts, I want to see confirming chart signals across all time frames.
For longer term trades, it is also smart to look at what the overall index is doing, as it will have an effect on the stock since all stocks have some correlation to the market. Here is what I look at:
Position and Swing Trades: look at the stock's parent index, this can be found in the Parent Sector tab on the Stockscores Quick Report for most stocks. I also look at the stock's parent market index. If the stock trades on the TSX, then I look at the chart of the T.XIU. If the stock is trading on the Nasdaq, I look at the QQQ. If the stock is a large cap company, I look at the SPY or the DIA, which are large cap indexes.
Day Trades: I tend to just look at the charts of the major indexes on an intraday basis when I am day trading, but I find that this is extremely important. If I am watching a hot Nasdaq stock, I carefully watch a two minute chart of the QQQ as well. If the stock I am watching is nearing a breakout point, and the Nasdaq is showing signs that it is likely to go higher, then I have a good trading opportunity. If the overall market is conflicting with the stock I am following, I will put less importance on the trade.
By looking at charts on multiple time frames and combining that message with the message from the general market, traders can improve the success potential of their decision making. A trade has better potential when all the charts confirm one another.
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Bottom fishing is the quest for stocks that are inexpensive relative to previous levels, but show signs that the bargain is going to end soon. We want to look for stocks that are a showing a break from pessimism, an increased level of confidence that the stock is undervalued, and signs of optimism for the future. Filtering for these situations gives the investor a short list of companies to perform their necessary due diligence on before speculating on a change in trend.
Buying a stock that is in a long standing down trend can be as dangerous as stepping in front of a freight train. It takes time for stocks to reverse trends, and buying what seems to be a bargain can be a crush to your portfolio. However, bargain hunting can be profitable if the timing is right. To effectively bottom fish beat-up stocks, you have to enter when there are signs that the downslide is slowing and a move back upward is imminent.
Market psychology takes time to reverse. When bottom fishing, we want to focus on stocks that have suffered a sell off and are cheap relative to where they once were. However, we want to also look for signs that market psychology is turning favorable on these stocks and that they are ready to head higher again.
This strategy focuses on three stages:
Stage 1 - a break from the show of pessimism
Stage 2 - a show of confidence
Stage 3 - a show of optimism
Stage 1 is essentially a breaking of the downtrend. If we draw a line along the top of the declining trend, we have defined the downtrend. A break of the trend arises when the stock can break upward and through that declining trend.
In Stage 2, we want to see signs that there is confidence in the break from pessimism. The market needs to show resilience that the downtrend is indeed slowing, and that the potential for an up trend is real. A consolidation following the break is a good show of this, and is more significant if it as at a level higher than the previous low. This is a rising bottom.
Finally, we want to find signs that there is optimism about the future of the stock. A breakout from a rising bottom is Stage 3.
I ran this Market Scan on Friday, and it identified 21 candidates. Of the 21, two stocks stood out as what I believe are good opportunities.
The ability to do this Market Scan and others is available to Stockscores Advanced members only. To take a trial of this membership, go here.
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1. T.MR
After making a double bottom, T.MR has consolidated at a higher low than the one made in mid August, and is not breaking through resistance with some enthusiasm today. Volume not great on the breakout, but it does look like the sellers are tired on this stock, and therefore, there is good upside potential, perhaps toward the $2.10 - $2.25 price range. Support is at about $1.50.
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2. ARIA
ARIA made a break of the downtrend in mid August and is now breaking from a rising bottom today, with higher than normal volume. The stock has made good gains over the last month already, so there is a bit more risk but a tight stop just under support at $6 should protect against the downside.
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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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