Advanced Stock Screening Techniques
How to filter stocks! What setups to look for! When to act & execute!
In previous section, we saw some basic methods regarding stock selection. We learnt about different stock groups and portfolio allocation. We understood basic setup - breakout pattern. In short, now we have some basic understanding of stock selection.
This section might be useful for those who have stock screening/filtering facility based on certain criteria/rules. Now-a-days, many stock brokers offer tools/services for screening stocks, even paid software's are available for reasonable price. Most stock screening tools provide simple filters (pre-defined filters) or advanced customized filters (building your own filters). Unfortunately, many of us DO NOT have a clue about what filters to use and why. Even though we might use right filters, we don't know when to BUY and when to wait patiently. This section is an attempt to explain few effective screening methods so that no matter what tools/software we use, we can use either pre-defined filters or create custom filters for our needs.
For every method we will look at following items:
This section might be useful for those who have stock screening/filtering facility based on certain criteria/rules. Now-a-days, many stock brokers offer tools/services for screening stocks, even paid software's are available for reasonable price. Most stock screening tools provide simple filters (pre-defined filters) or advanced customized filters (building your own filters). Unfortunately, many of us DO NOT have a clue about what filters to use and why. Even though we might use right filters, we don't know when to BUY and when to wait patiently. This section is an attempt to explain few effective screening methods so that no matter what tools/software we use, we can use either pre-defined filters or create custom filters for our needs.
For every method we will look at following items:
- Why to use this method? - Reasoning
- What to look for and how to execute? - Setup
- Advantage of this method - Benefit
Stock Filtering Methods
1. Buying IPO
Reasoning:
Setup:
Benefit:
2. Six percent (price & volume both) move on upside in a day (that days high price - low price)
Reasoning:
Setup:
Benefits:
3. With in 15% of ALL TIME HIGH
Reasoning:
Setup:
Benefits:
4. Relative Strength
Reasoning:
- DO NOT misunderstand, we are not buying IPO on 1st day (the day when it is listed on the trading exchange and starts trading publicly), rather we will BUY at some later point (after it is listed and open for public trading) when it provides an excellent buying opportunity with good setup
- Any stock which has been listed on any publicly traded exchange for less than 1 year is considered an IPO in our discussion here
- Typically, if IPO breaks the all time high on a good/high volume then it might make a huge move in a very short span of time, the idea is to capture this move in swing trade
Setup:
- Identify stocks which are trading for less than 265 days (trading days excluding holidays) but with a decent volume of more than 100K shares in last 3-5 days
- Look for stocks which are within 15% of their all time high
- Typically you might see a "V" or "U" like pattern and occasionally you might see that the IPO rise in price and then consolidate
- Once the stock is near its all time high, it tends to consolidate near that range and then breakout on good volume
- Target price would be all time high + difference (between all time high and recent low of the trough)
Benefit:
- Once the all time high is broken with good volume, the IPO reaches its target price within next 3-10 days providing quick gains
- Since the all time high is broken, technically the stock does not have a resistance on the upside move
- If company fundamentals are good then stock may consolidate near target price and then continue its journey higher providing 2nd buying opportunity
2. Six percent (price & volume both) move on upside in a day (that days high price - low price)
Reasoning:
- A 6% move in a stock price on a given day with 6% volume more than its average volume on the same day indicates perception about that company has changed
- This could happen due to new company news or earnings or break through or mergers/acquisitions or surprise element
Setup:
- Identify stocks which move 6% in price along with 6% higher volume than average volume in same day, use the criteria to find all stocks with such move in last 30 days, avoid stocks which gap up, we are looking for difference between high price and low price on the same day
- Typically, after the initial move, stock tends to pull back to its 20 days moving average or consolidate in a small range, this can last for few days to few weeks hence be patient
- After the pullback/consolidation, the day this stock makes a move higher on higher volume, the price should be higher than previous days high and volume should be higher than its average volume along with higher than previous days volume will be our BUY trigger
Benefits:
- Stock making such a massive move can be justified ONLY because something about that sector or company changed
- Provides a momentum push to the stock which could act as inertia
- Once a stock gets momentum, it can keep going in that direction for couple of weeks/months, however always have STOP LOSS LIMIT as things can change quickly
3. With in 15% of ALL TIME HIGH
Reasoning:
- Stocks trading near their all time high have high probability to breakout
- The reason they are near all time high suggest that the company might be doing well or there are more buyers than sellers
- After the breakout, technically there is NO resistance on UP side move
Setup:
- Identify Stocks which are within 15% of their ALL TIME HIGH price and NOT 52 week high price
- Checkout earnings for last four quarters along with sales (this data is available for free on many websites), typically earning trend should be rising
- Checkout what business company operates, look for high growth business (NOT easy to identify) but give it a try
- Once the stock breaks out on good volume, it will be our BUY area
- Occasionally, such stocks gap up on earnings report, wait for stock to pullback and then BUY
Benefits:
- Since the all time high is broken, technically the stock does not have a resistance on the upside move
- As the company operates in high growth business, price appreciation is significant and can be considered as LONG TERM investment
- Cost averaging on the way UP can provide good boost to your portfolio returns
4. Relative Strength
What do we do if market is in correction or Bear market cycle!!!
When market is going down (market correction or bear market) then how should we choose stocks. We do not recommend buying stocks when market is moving down as momentum strategy does not work. It is best to have patience and stay in cash or invest in bear ETFs. Remember, market correction can last for several weeks/months. However, in bad market some stocks will make big moves but to identify such a group is not an easy task. Our primary goal is to protect our capital.
When market is going down (market correction or bear market) then how should we choose stocks. We do not recommend buying stocks when market is moving down as momentum strategy does not work. It is best to have patience and stay in cash or invest in bear ETFs. Remember, market correction can last for several weeks/months. However, in bad market some stocks will make big moves but to identify such a group is not an easy task. Our primary goal is to protect our capital.
