Before we start, some housekeeping. Ever since the "flash crash" moment and all the volatility in the market, I have moved to a nightly model for trading. As you'll recall, before I would look at the landscape every weekend and find the best tradeable opportunity I could on a weekly basis. I've seen this movie we're in before and know that I would have gotten diced up pretty nicely operating that way, so now the mechanics behind what I do are exactly the same, but I do it on a nightly basis.
Market Direction
So, where do I start? I start by deciding whether or not I want to put on a long or short position. The way I do that is the easiest thing in the world. Compare the level of the accumulation/distribution line (A/D) with that of the day before. If it's higher than the day before then if I put on a long position. If it's lower than the day before, then I look for a short position. The only thing that would keep me from putting on a position is if I have my portfolio more than 75% invested in any one direction. If you get to the point where you are putting more than that on, I find almost inevitably that the trend is about to reverse, and you are just putting money out there to lose it. So in those cases, I'll just close the computer and go away.
Barring that, I always put a trade on. If I don't find an individual stock, which hasn't happened in a long time, I'll either buy the SPDR S&P 500 (SPY) or ProShares Short S&P 500 (SH) ETFs. That's not where the action is, but it's better than nothing.
For example, the chart for today says I should put on a long position. Notice how the A/D is pointing upward:
You can indeed pick this apart for a number of reasons, just like you can pick anything apart in trading, but I've found that:
- By limiting yourself to one trade a day or week, depending on what the rythm is, you don't overcommit yourself to your theories and passions all at once and keep yourself out of Vegas mode.
- By using the A/D as your barometer, you let the market dictate the flow of your funds based on its recent direction and volume flow. You are always timing the market without making any brash decisions at once.
Works out pretty well for me and really keeps the emotion out of it. So now I need to find a stock to go long. I, and the vast majority of folks out there, use a handfull of screens to do that. I screen on fundamentals first, and if I don't find anything there, then I screen on technicals.
Long Fundamental Screens
When I screen for fundamentals, I am looking at various aspects of the financials of the company. I also use Finviz.com for all my screens. The basic service is free and does just fine. You can build these screens on your own in no time. Here they are:
For All Screens
- Average Volume > 100K - You want your stocks to trade at least at this daily rate or you could get stuck in them or have to get out at a bad price because there is no one offering at the price you want when you want to sell them.
- Price > $5 - Stocks priced below this level generally fly around and are of lower quality. You get what you pay for. For people just starting out may want to set this threshold to $10 or $15 for added safety, but your selection of positions to trade is lower.
I start with the two criteria above and then add the below to form the other screens.
30% Growth in Uptrend
- Price/Free Cash Flow <15>EPS Growth Over 30% - This is the first place that hedge funds and money managers look to find their high flyers. Anything above 30% is considered the hot thing out there, and that's where you want to be.
- 50-Day Simple Moving Average Price Above SMA50 - If the price is above the 50-day moving average, and the 50-day moving average is above the 200-day moving average, then the stock is generally moving from the lower left to the upper right, and you want that. In other words, it's generally in an uptrend.
- 200-Day Simple Moving Average SMA200 below SMA50 - See criterion #3.
IBD
This screen is kind of modeled around the criteria Investors Business Daily uses to screen their stocks, but unless you buy their publication and/or their screening products, you won't match it exactly. The way I do it is good enough for me, though.
- EPS Growth this Year >25%
- EPS Growth Next Year >25%
- EPS Growth Qtr over Qtr >25%
- Sales Growth Qtr over Qtr >25%
- Return on Equity Over +15% - They use a threshold of 17%, but this is the closest you can get on FinViz.
So really what you are doing above is trying to get 25% growth over various time scales and dimensions. This will yield another list of generally high flyers.
Below, I have a couple of technical screens, and we have to cover the various motivations for using them and how they are used in another post because it will require many words to do so. By the way, I run these screens on the StockCharts.com Scan Engine.
Extremely High Volume
- Volume 0 Days Ago >= SMA Vol. 50 0 Days Ago x 7 - To translate the geek (not Greek) here, you're basically looking for a stock that on the current day, had at least 7 times the shares changing hands than the average over the past 50 days.
When this many shares have changed hands, usually, either the company:
- Had a huge earnings surprise or news event
- Reached a key technical level, and the bulls and bears fought it out all day
- Was acquired or a deal fell apart
Items 1 and 2 will often signal a near-term change in direction, mostly item 2. Item 3 is not a tradeable event for me. Item 2 can be very lucrative. Item 1, sometimes.
Weekly Cross 30 RSI
- RSI 14 0 Weeks ago >= RSI 14 1 Week ago
- RSI 14 1 Week ago <= Constant = 30
- Acc/Dist 0 Weeks ago >= Acc/Dist 5 Weeks Ago
- RSI 14 0 Weeks ago >= Constant = 30
All this mumbo jumbo gets you a stock that:
- Moved out of oversold (30) territory in the last week, and
- Has an A/D line that signals accumulation of shares over the last 5 weeks
And voila! From those lists, you go look at the charts and find the best stock to buy on that day. Of course now you have to read the charts, which is a whole different animal altogether, but at least you know where the fertile ground is now.
As usual, thanks for reading!
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