June 28th, 2009

Panning for Nuggets

Most don’t understand that perhaps the best use for technical analysis (charts) isn’t to predict; I believe the best tool for charts is enhancing timing. Charts don’t necessarily tell you which direction a stock or an Index will move or where it will be in six months. But what charts do is to help you to see and understand when a stock or an Index has gained sufficient momentum to initiate a significant directional move.

So we’re sitting around these days while the Market trys to figure out which direction it wants to go. Since early May, most have been waiting for a correction to begin after the 35% move up from the March lows. But each time the Market retreated, buying volume entered as support. The S&P 500 is still above the traditional 200-day moving average. But more significantly, its ability to hold its ground has allowed the 180-day moving average to start to turn up along with the 60- and 90-day moving averages.

About the best thing to do these days is to go prospecting. It’s been about a month since reporting to you my metrics of the market’s internal health. These statistics concern the number and extent of stocks developing upward momentum as measured by a number of moving averages of their prices.

I began monitoring these metrics in January (click here) as we followed the Market’s improving health. This week, I’m adding two new metrics – stocks making new covering the past 200 days (approximately the past year) and the number of stocks making high highs covering the past 1000 days (approximately the past 4 years-one reason the number is lower is that stocks that began trading within the last 4 years are excluded since they don’t have a 1000-day moving average). Until a couple of weeks ago, almost no stocks had advanced enough to register a new high. The statistics are (as always, click to enlarge):

Why are these metrics important? Because one school of thought about momentum trading is that the key to making money in the market is to “buy high and sell higher” rather than to “buy low and sell high”. This strategy is especially powerful when the market is in the Mark-up Phase of its life cycle (see October 17) and I believe we’re at the cusp of transitioning from the Accumulation to the Mark-up Phases. It will be interesting to see if these numbers grow.

I consider stocks making new highs to be in the vanguard. Each criteria is increasingly more difficult to meet: 12-month new high, 4-year new high, bullishly aligned moving averages. They’re stocks that are leading the rest of the 6000 or so stocks to virgin new high territory. They are in the envious position of having few owners that show losses from in their positions. But which are these leading stocks? I’ve created a spreadsheet as of last Friday’s close (click here) listing these stocks and indicating which of the criteria they met (along with noting the 36 that are in IBD’s 100 leading stocks).

One example is PALM one of the few stocks that has had a bullish cross since April along with registering yearly new highs; it recently notched a 4 year new high:

There’s no way to tell if Palm’s seven-fold appreciation will continue and, if so, how far momentum will carry it (traditional technical analysis indicates the trendline represents the half-way mark, after a buyers remorse correction back to test the trendline as support).

I wish I had spotted PALM back in April; heavens knows there was enough conversation concerning its new PRE phone. I missed it but that’s the beauty of the market: there’s always another nugget out there to find, it’s just knowing where to look and how to spot them. Could it be SPPI, VIT, SNTS, LZR, CKSW, FRPT or LCI. I hope this list will be a way for you to begin.

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  • Guru

    Dick,

    Thanks for asking. I'm still working on it and, on the July 4th weekend the project will hit its second anniversary. I never imagined when I started it:

    1) how hard it would be to clearly get your ideas down on paper (or into MS Word),
    2) how much I would learn in the process,
    3) how a major market event like the Financial Crises Crash would crystallize the need for a book like mine.

    I'm adding editing and adding some final touches. But your asking motivates me to speed it up.