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Stockscores.com Seminars - Calgary

I am going to teach the StockSchool Pro course later this month in Calgary. If you have an interest in learning how to be an effective stock trader, you should come to one of my free presentations this week, where I will demonstrate the concept behind what I have been doing for the last 10 years as a stock trader. Presentations are free, but please register at the links provided below:

Wednesday, October 15 7:00 pm
Carriage House Inn - Phaeton Rm
9620 Macleod Tr. S.

Thursday, October 16 2:30 pm
Sheraton Cavalier NE - Sheraton Rm.
2620 32 Ave NE

Thursday, October 16 7:00 pm
Sheraton Cavalier NE - Sheraton Rm.
2620 32 Ave NE

Stockscores.com Trading Clubs

The Stockscores.com Stock Trading clubs are a great way to learn better investing and trading skills, and meet other market players. Membership is a mere $10 per month.

Calgary Meeting
Tuesday, Oct 14, 7:00 pm
University of Calgary
Murray Fraser Hall Rm. 160

Vancouver Meeting
Thursday, October 30 6:30 pm
Best Western Abercorn
9260 Bridgeport Rd, Richmond

This month, our agenda will include:

Market Overview
Search for Opportunities
Option Basics
Playing the Pullbacks
Trade Decision Logic

Hope to see lots of you there!

Stockscores.com Perspectives
For the week ending October 10, 2003

In this week's issue:

Weekly Commentary
Strategy of the Week
Stocks That Meet The Featured Strategy

This week, I thought I woudl review what the Stockscores are based on , and how to best use them.

Background

So long as a stock has traded for 200 days, Stockscores.com can provide its ratings. The site appraises approximately 20,000 stocks, indexes, trust units and exchange traded funds. Each is given two scores; the Signal Stockscore and the Sentiment Stockscore.

The Stockscores are based on analytical models derived from the stock's trading activity. Each stock starts with 50 points, and the Stockscores are adjusted up or down based on a number of technical analysis criteria. For example, if a stock has a bullish MACD Indicator (MACD stands for Moving Average Convergence Divergence, and measures whether short and longer term moving averages are converging or diverging relative to one another) it will get 3 points. If the MACD is bearish, the stock will lose 3 points.

While many of the components of the Stockscores indicators are based on common technical analysis concepts, there are also proprietary components that improve the predictive power of the tool. For example, stocks achieving a statistically significant abnormal gain will receive a number of points, since abnormal activity is often an indication of a shift in the perception of fundamentals.

Other important factors in the Stockscores calculation include moves through support or resistance, indications of accumulation or distribution of a stock, the presence of high probability chart patterns or measures of the general trend. Each stock is given its Signal Stockscore based on the combination of many indicators and concepts, and is put on a 100 point scale. However, no stock can achieve a Stockscores lower than a 2, or higher than a 98 (to indicate that there is no such thing as a sure thing in the stock market).

The Sentiment Stockscore is simply an exponential moving average of the Signal Stockscore, designed to smooth out the volatile fluctuations that can exist in the Signal Stockscore.

The Sentiment Stockscore is useful for assessing the mood of the market relevant to a stock. If investors show a greater willingness to buy a stock than sell it, the Sentiment Stockscore will be above 50 and rising. Below 50 and falling indicates a greater desire to sell the stock by market participants.

The important threshold for the Sentiment Stockscore is 60. Stocks with Sentiment Stockscores of 60 or higher are deemed to have an optimistic outlook by the market. Below 60 and falling indicates the market is pessimistic and below 60 and rising indicates the market is neutral. A Sentiment Stockscore of 80 is not better than a Sentiment Stockscore of 62. What is important is whether the Sentiment Stockscore is above or below 60, and whether the Sentiment Stockscore line on the chart is rising or falling.

The Signal Stockscore is a shorter term indicator of investor enthusiasm. The market is often showing strong buying enthusiasm when the Signal Stockscore is above 80. If investors are buying the stock with enthusiasm, it is often because there is a perceived significant fundamental change that can drive prices higher as more market participants perceive the improvement.

The Three Rules

Combined, the Stockscores indicators provide two basic rules. First, only consider stocks that have a Sentiment Stockscore of 60 or higher, and second, focus on the charts of stocks that have a Signal Stockscore of 80 or higher. When these two criteria are met, there may be a high probability opportunity in the market.

Does this mean that we should buy any stock that has a Sentiment Stockscore of 60 or better, and a Signal Stockscore of 80 or better? No, the Stockscores are simply a way to put potentially good stock charts in front of you. They are designed to simplify technical analysis and eliminate many stocks that do not have a good risk/reward scenario.

The third, and most important rule, is to consider the chart of the stock and assess whether the pattern has predictive value. Many chart patterns indicate a probable future trend. For example, a breakout from an ascending triangle pattern (one where there are rising bottoms toward a flat top, and decreasing volatility over time) has a high probability of predicting an up trend.

If the stock you are considering has a Sentiment Stockscore of 63, a Signal Stockscore of 98, and a high probability pattern, you may be looking at a very good opportunity to profit in the stock. However, remember that every stock also has a correlation to the market. To be successful investing, the investor should also ensure that they are not fighting the trend of the market.

For example, if you are considering a gold stock that has good Stockscores and a promising pattern, it is also a good idea to check the Sentiment Stockscore of the gold sector index. If the index has a rising Sentiment Stockscore line, the market for gold stocks is optimistic, and improves the potential for the individual gold stock you are considering. However, if the Sentiment Stockscore is heading lower, the market is pessimistic on the industry and buying the stock has an added element of risk.

When using the Stockscores indicators, remember to keep it simple. Step one, ensure that the Sentiment Stockscore is 60 or higher, as that is a good indication of the market's outlook on the stock. Second, check to see that the Signal Stockscore is 80 or higher, as that is an indication that the stock's chart may be showing a good pattern. Third, look at the stock's chart to ensure that the stock has not already gone up significantly, and is breaking from a high probability chart pattern.

The Bursting Bubble. It sounds quite dramatic, doesn't it? There will always be stocks that go up too fast, too far, and get too full of too much hot air. Remember the first quarter of 2000? Virtually every technology stock was a bursting bubble, destined for a sharp pull back.

I use this strategy to find stocks that have move higher on euphoric buying momentum, but are showing signs that the bubble may soon pop. We get a sign of a profit taker led turn around when the stock hits a new high, trades strong volume, but closes below its open. The initial selling can snowball in to a panic rush for the exit door as many investos leap to lock in profit while a select and unfortunate few hang on with a belief of the dream that led them to buy the stock in the first place.

I ran this Market Scan this week, and it found 40 candidates. Of the 40, two stood out as likely to see a quick move lower, and worth shorting by those traders nimble enough to know when to get out, and when to cover the position.

1. T.IVN
Sometimes stocks just go up too far. It is the madness of crowds that causes a piling on effect among investors, and unfortunately, the last one piling on can be left holding the bag. The chart for T.IVN shows a good deal of euphoric buying activity, but today the stock hit a new high on strong volume but could not hold above its open. When a stock has moved up as sharply as this one has, that is a pretty good sign that profit takers are going to take over and the stock will likely pull back. This presents a trading opportunity for those nimble enough to take advantage of it. T.IVN looks like it will go lower in the short term.

2. FJC
You know the disbelief you feel when there is a crowd of people around the bargain bin at your local Wal Mart in an apparent feeding frenzy on some low priced junk? I often think these people are just buying inventory for next year's garage sale, but the emotion of a crowd can make people make impulse decisions that they may regret later. There are lots of similar stories in the stock market, cases where stocks just go up too far. This stock has been great for those that own it, but it appears that maybe a touch of rationality may correct this 60 day double back a bit in the short term. Nimble short sellers should only consider.

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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