March 18th, 2007
While everything still looks good and the markets are setting up to breakthrough on the upside, a word of caution is warranted. Before another huge leg up for the market coming in the late summer and fall, there could be another 5% added to the correction that started last week. Check out the topping pattern that’s forming in the S&P500 chart:
It’s too early to say whether that it’s a head-and-shoulder pattern, the beginnings of a pennant pattern or anything else. What’s clear, however, is that volume is deteriorating as prices started moving up. If volume doesn’t pick up and the index begins to labor as it approaches 1462 (the previous high) then there will be another leg down …. my guess to 1315-1320, or 6%.
What to do in the meantime? A look at the industry groups that continue to move up in the ranking are the Oil & Gas and alternative Energy sectors:
Stocks on the Move
I’ve already described how I integrate the IBD Industry Groups with my charting software (for more information, click here and prior). Another tool I use is IBD’s daily Stocks on the Move. This is a list of 20 stocks (probably of IBD’s list of top 500 stocks) according to % change in volume. According to IBD:
“To determine unusual activity we measure every stock’s current trading volume. Each stock’s current volume is then compared to its normal trading by this time in the market session, based on the last 50 trading days. The percentage change is then computed, alerting you to unusual activity while it’s happening.
Stocks moving up on unusually high volume may warrant further research. IBD Stock Checkup and IBD Charts can help you research these prospects further. The qualification criteria for listing in ‘Stocks On The Move’:
- Stocks must trade on the Nasdaq or New York Stock Exchange.
- Stock price must be at least $20.00 ($16.00 for Nasdaq).
- Stocks must have a price change of 1/2 point or more.
- 50-day Average Volume must be a minimum of 60,000 shares.
- For stocks up in price only, the Earnings Per Share (EPS) and Relative Price Strength (RS) Ratings must each be a minimum of 70, Accumulation/Distribution Rating must be D+ or better and next year’s earnings estimate must be 15% or higher from the previous year’s earnings. (Stocks without earnings estimates are included.)”
I look at this daily list and, at times, find stocks that have achieved their volume surges due to breakouts from a consolidation base (those I often buy so I can take a ride on their momentum coattails). Most on the list, however, are clearly and strictly momentum stocks that have had huge run-ups. Only someone who believes in the “Buy high, sell higher” strategy would buy those stocks. I want focus on stocks where the water is boiling, steam building and where the lid is about to blow off the pot.
So I developed an “Easy Scan” (a feature tool in Telechart) to simulate the filters IBD might use. My filter focuses on mid- to large-cap stocks, over $1 and have experienced large spikes in volume:
Based on Friday’s close, the scan netted 307 stocks which I then sorted by the extent to which the stocks exceeded the market performance over the past 30 days (a sorting option in Telechart based on RSI). Some of the interesting names at the top that haven’t yet broken (extremely) through their base formation (and worthy of further research) included (charts are stocks links):
- CMGI Inc. (CMGI)
- Anadigics (ANAD)
- Global Industries (GLBL)
- Avnet (AVT)
- Longs Drug Stores (LDS)
- Fairfax Financial Holdings (FFH)
- United Stationers (USTR)
- Landamerica Financial Group (LFG)
- Brocade Communications (BRCD)
- SPSS Inc. (SPSS)
It’s a difficult decision: buy Oil, Gas and Energy stocks, emerging momentum stocks or do nothing since we’re entering a waning lunar phase!?
More to follow soon …….