July 23rd, 2009

Stock Picking Now Feels Like Shooting Fish in a Barrel

This is a great time to be a stock picker! You don’t hear many say this these days but it’s exactly the way I feel. The market and economy felt like they were going you know where in a hand basket on March 9. But now that seems so long ago and with the vantage of the slow, 10-month market turnaround as reflected in that inverted head-and-shoulder pattern, picking stocks feels almost as easy as shooting fish in a barrel.

Again, let’s start with the big picture. It’s not often that you can start with a clear slate (in other words, if you’ve been a reader here for some time you know we were in essentially a 100% cash position throughout last year’s crash and only started dipping into the market around the all-time low in March). So we have little garbage to clean out and now have the pleasant task of finding new seeds to plant (sorry for the idioms and cliche’s but using them makes it much easier to convey complex concepts).

Many stocks have charts that closely reflect the market’s bottom reversal pattern and, as I’ve often said, look like horses in their starting gates. Techniques we’ve mentioned before to narrow the field include selecting stocks with: “Golden” or “Bull” Crosses”, making new highs, membership in leading industry groups.

Another technique is to scan all stocks for those meeting specific criteria. I call one such scan “Stocks on the Move” loosely based on the lists IBD creates with that title. The specific criteria include:

  • Price per share > $15
  • Price percentage change today > 0.5%
  • Relative Strength Indicator today > top 50%
  • MoneyStream Surge for past week > top 50% (proprietary to Telechart grew out of joint venture with a large regional brokerage firm to develop a price/volume indicator. The result is an indicator with much the same objectives as OBV and is interpreted in the same way you would interpret OBV. Generally, you look for divergences.)
  • EPS percentage change from 4 qtrs back > top 50%
  • Volume surge over past 5 days > top 50%

Sounds complex but the results filtered out with 135 amazing stocks(click here for spreadsheet). I don’t mind saying I have a hard time deciding which of these 135 I’m going to add to my portfolio but I would feel comfortable and sleep well with nearly any of them (with the caveat that the market remains constructive by crossing above the neckline by Labor Day, as we expect it will).

These are momentum stocks and if you select nearly any of these are momentum stocks there’s a high probability of beating the S&P 500 benchmark in the short run. But the list is very dynamic (interestingly, only 6 of 135 are currently in the IBD 100; it will be interesting to see how many will make it on the list over next 3-4 weeks). If I run the scan next week, new names will be added and some current ones dropped. If you are a “buy-and-holder”, this isn’t for you. If you’re a trader, scrolling through their long-term charts (12-months) will produce many you’ll want to own too. Like, for example:

  • ANR (Alpha Natural Resources)
  • CYT (Cytec Ind)
  • NTGR (Netgear)
  • VMW (VMWare)

This last chart is the most complex but also a great tool for chart reading training. It started out as a symmetrical triangle which could have been either a consolidation or reveral pattern. But the March 9 market bottom resulted in a break out to the upside…up to the topmost peak of the triangle …. resulting in a horizontal resistance trendline.

The July retracement from that resistance trendline could be considered a horizontal channel representing a traders’ remorse correction of the symmetrical triangle (or the handle of a cup-and-handle pattern in the IBD jargon). No matter, a break above 32.50 will lead to another traders’ remorse correction at 40 before the July 2008 gap is filled. Some will say this is all reading too much into a chart ….. we’ll watch and see.

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  • Jonathan

    Well. Nice work.

    I'm digging into your file right now loading up charts and looking for opportunities.

    Thanks for sharing your work.

    Jonathan
    http://guillouj.blogspot.com/

  • Dirk

    Hi Guru,
    you said "with the caveat that the market remains constructive by crossing above the neckline by Labor Day, as we expect it will"

    hasn't this happened already? If it sticks is another story. The sp-500 seems to be above the neckline to me. Am I missing your point somehow?

  • Dirk

    should have mentioned this but the neckline I mentioned is on the "reverse" H&S for the sp-500

  • Guru

    It is above the neckline but only by a hair. And placing the neckline is very subjective … it's sort of like calling the beginning of or the end of a recession …. you don't know where it is until you pass it.

    The confirmation that's been missing, so far, is an increase in volume. We may be getting that today.

  • The Small Fish

    It is above the neckline, but i suppose it would not be out of the question to get a snapback retest of that neckline – and that is where you want to see a rally off the support.

    I think this market is a firm ground for the next 2 to 4 weeks. Numerous studies are supporting a higher market in the coming weeks. dips i think are to be welcomed and bought.