The Stockscores Approach Research Process
Stockscores.com Perspectives for the week ending November 5, 2004
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In this week's issue:
How do you identify opportunities in the stock market? There are an infinite set of methods that investors use to find and execute a trading opportunity, but the tools of Stockscores can make the process simpler and more efficient. With the power of technology, it is possible to research the entire stock market each day in only ten minutes. Here is the process for finding stock market opportunities that I go through each evening.
First, I determine whether I should be looking for buying or short selling opportunities. I look at the chart of the major North American indexes (Dow (DIA), Nasdaq 100 (QQQ), S&P 500 (SPY) and the TSX 60 (T.XIU)) and I assess whether the overall market is more likely to higher than lower. Ideally, I like to buy stocks if the Sentiment Stockscore is above 60 for these indexes, and I will learn toward buying if the line is simply rising upward.
I then use the Market Scan tool on Stockscores to search for opportunities that meet the criteria of one of my Strategies. If the overall market is showing optimism, I will tend to lean toward the Stockscores Simple or Bottom Fishing Market Scans. I run these scans against the market, and Stockscores provides me with a list of candidates. I must now inspect the charts of these stocks to see if they have good patterns.
At this point, I may have to look at 50 - 100 charts. It can take a long time to do this, so I will usually use the Gallery Chart Viewer tool on Stockscores because it allows me to look at 10 charts on a page, to quickly check if the patterns have potential. If I see a chart that I like, I will add the stock to a Watchlist using the Watchlist Creator Tool, which has a link from each chart in the Gallery View. Through this process, I am building a list of stocks that deserve closer attention.
Once I have gone through all the charts revealed by the Market Scan, I now take a closer look at the stocks that showed promise and were added to the Watchlist. I utilize the Slide Show Chart Viewer to do this, because it allows me to look at larger versions of the charts where I can see more detail.
There are three types of charts that I will find in this process. First, are the charts that are not good enough, and I will simply ignore these stocks. Next are the charts that have patterns that look to be pretty good, and worth further consideration. If I like a chart and I think it is likely to move upward, I will then assess whether the stock has enough reward potential for the risk inherent in the trade.
The Stockscores Risk Calculator helps me to do this. With this tool, I can enter in the purchase price, expected exit price and the stop loss price and calculate what the anticipated risk/reward ratio is. I don't like to take trades that don't have twice as much reward potential for the risk I must take. If there is not enough reward for the risk, I discard the opportunity from consideration.
Some stocks will have great potential, but have charts that need a critical event to make them opportunities worth taking. For example, I might see a stock that has a nice ascending triangle pattern, but has not yet broken through resistance. This kind of stock is worth considering if a breakout occurs, so I use the Stock Alerts tool on Stockscores to keep track of the stock for me. This tool allows me to enter criteria to be alerted to. I might want to know when the stock breaks above a price level, and can set that in to the tool. When that event happens, I will receive an email to my cell phone or email account alerting me to the event.
The stocks that I find with the Market Scan that have good chart patterns and have enough reward potential for the risk are trading opportunities worth taking. I make a plan to enter a position in these stocks provided the stock does not run away from me before I can buy it. It can happen that the stock I like can gap up significantly before I get a chance to take a position, in which case the risk of the trade increases and the reward potential decreases, which may make the trade undesirable. I don't chase stocks higher if this happens.
Once I own a stock, I will enter it in to another Watchlist using the Watchlist Creator tool, and monitor it daily for an exit signal. When the stock gives me a sell signal based on a move through support, I will exit the stock.
After the trade has been completed, I then print out the chart of the stock, and make an entry in to my Trading Journal. I write down why I bought the stock, why I sold, what I gained or lost on the trade and where I may have made a mistake in executing the trade. This Trade Journal will be very valuable later when I go back and review recent trades. I may find that there are recurring problems in my trading approach that deserve attention.
Stockscores is a powerful tool for investors, and there is a lot more to it than just the Stockscores indicators. Try using some of the tools of Stockscores by signing up for one of our free trials available in the Site Membership area of the Products drop down menu.Back To Top
Companies that announce major news after the close of trading will often gap up in price the following day. An upward price gap occurs when the low of the current trading day is higher than the previous day's high. This abnormal price activity is useful because it indicates that the stock is trading more on its own story and less on the general movements of the market.
The Gap Ups strategy seeks stocks that are gapping upward on abnormal volume from low price volatility. Adding in these extra criteria improves the probability of picking a stock that is likely to go in to an up trend in the future. By focusing on stocks with low price volatility before the gap, we focus on stocks that were truly surprised by whatever motivated the price gap. Since the market's psychology is shaped by the past performance of the stock, price gaps tend to influence the market's mood favorably, and create optimism. This optimism can lead to a further price appreciation.
However, stocks that gap up often have to take a rest before they try to go in to an up trend. The sudden move to the upside is met with selling pressure as some investors happily sell at a profit, without regard for where the stock may be going in the future. When faced with fast money, many investors take their profit and run.
Therefore, it is often better to wait for entry in to a stock that gaps up in price. After the gap up, patience for a subsequent close above the gap day high can improve the probability of success again. Of course, having this patience can also mean paying a higher price, or being left without a position in a strong stock.Back To Top
1. MROI
A good break from a rising bottom consolidation, I would not be surprised to see this stock pull back for a few days before it works on a move toward resistance at $14. If it can pull back for few days without penetrating support at $10.75, it should give a good entry point that makes the risk/reward ratio adequate for the trade.
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2. IMGN
IMGN made a nice break from low volatility and an optimistic chart pattern on Friday, but it was a bit disappointing to see the stock close below its open on the breakout day. I think we may see the stock pull back a little bit, but the longer term chart shows a break of the downtrend that should materialize in to further strength in the months to come. As long as support at $5 can hold, I think this stock has pretty good potential.
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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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