What You Don’t Want

Stockscores.com Perspectives for the week beginning Nov 30th, 2009

As investors, our natural inclination is to seek out stocks that have good qualities. We look for reasons to buy the stocks we are considering and often forget to look for the negatives. Since there are thousands of stocks to consider and almost all of them can have some reason for buying them, it may be better to reverse how we approach the analysis of stocks. Looking for reasons not to buy a stock will emphasize a higher standard for the stocks you do buy and will help to improve your overall market performance.

Here is a list of common reasons I use to throw a stock out of consideration:

Too Much Volatility

Volatility is uncertainty. Virtually every good chart pattern that I use to find winners demonstrates a break out from low volatility. The narrower the range before the breakout, the more important the breakout becomes. If the stock’s price is moving all over the place before it makes a break through resistance then there is a much greater chance that the breakout is false and will likely fall back. Ignore stocks that have a lot of price volatility before the break out.

• Get the $3,600 StockSchool Pro Free by just opening an account at:
  
• 
• DisnatDirect named the number one Canadian brokerage for Traders by Surviscor! Open and Fund a brokerage account with DisnatDirect and receive the StockSchool Pro home study course free, including special Pro level access through the DisnatDirect client website. Offer only available to Canadian residents. For information, click here

Not Enough Reward for the Risk

A stock can go two ways, up or down, after you buy it. If the upside potential is not enough to justify the downside risk, then you should ignore the opportunity. I like stocks to have at least double the upside potential for the downside risk. That way, you don’t have to be right even half of the time to make money, provided you are disciplined of course.

Lack of Optimism

Fundamentals do not matter. It is the perception of Fundamentals that matter. If investors are not showing some optimism about a company’s prospects then it is likely that they are not paying any attention to the company’s fundamentals. Look for rising bottoms on the chart as an indication that investors are optimistic, if there aren’t any, leave the stock alone.

No Abnormal Behavior

The stock market is efficient most of the time. That means that you can not expect to consistently beat the stock market because all available information is priced in to the stock and your success at predicting new information can only be random. To beat the market, we have to look for break downs in market efficiency. I find that the best way to do this is look for abnormal behavior in the trading of a stock because it implies that there is significant new information playing a role in the stock’s performance. I don’t consider any stock that lacks abnormal behavior in its recent trading.

Too Far Up

The higher a stock goes, the riskier it becomes. I don’t like to chase stocks higher. If I look at a 6 month chart of a stock and it has made more than two steps up, I don’t consider it. A one day run of substantial gains is not a concern; I want to ignore stocks that have been in upward trends for some time. Look for stocks that are breaking from periods of sideways trading, not up trends.

Lack of Liquidity

The more often a stock trades, the easier it is to get in and out of it. Stocks that are not actively traded tend to have wider spreads between their bids and asks and it can be difficult to move in and out of the stock. Don’t consider stocks that don’t trade every day and they should trade at least 50 times a day but more is better.

Mixed Messages

I always try to look at a stock’s chart on more than one time frame. If the message is not the same on both charts, I leave them alone. When day trading, look at the daily and intraday charts. When position trading, look at the daily and weekly charts.

Any time you think a stock has great potential, give this list a look and see if any of these factors show up. If so, it may be a good idea to move on and look for something else.

Since the US markets were closed on Thursday and only traded for half a day on Friday, it is hard to get a read on new opportunities for next week. I was able to find a few good trade set ups earlier in the week that I featured in the daily newsletter. Each are still worth considering:

1. T.ORA

T.ORA has been moving higher for about two weeks after a break out of a trading range. Volume has been rising steadily over the past couple of months. Looks good so long as it can hold above support at $3.55.

2. CWST

CWST broke out on heavy volume from an ascending triangle earlier this week and has been consolidating over the last three days. I think you could put a tight stop at $3.79, with the understanding that there is a higher probability of being stopped out than if you put your stop at daily support at $2.90, but you also get a better risk reward ratio.

Click HERE for the Speaker Lineup and click  HERE if you want to learn from some of the timeless advice from some of worlds best traders including the very successful Tyler Bollhorn.

Tyler Bollhorn started trading the stock market with $3,000 in capital, some borrowed from his credit card, when he was just 19 years old. As he worked through the Business program at the University of Calgary, he constantly followed the market and traded stocks. Upon graduation, he could not shake his addiction to the market, and so he continued to trade and study the market by day, while working as a DJ at night. From his 600 square foot basement suite that he shared with his brother, Mr. Bollhorn pursued his dream of making his living buying and selling stocks.

Much of Mr Bollhorn’s work was pioneering, so he had to create his own tools to identify opportunities. With a vision of making the research process simpler and more effective, he created the Stockscores Approach to trading, and partnered with Stockgroup in the creation of the Stockscores.com web site. He found that he enjoyed teaching others how the market works almost as much as trading it, and he has since taught hundreds of traders how to apply the Stockscores Approach to the market.

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.