Stockscores.com Perspectives
For the week ending October 6, 2000
In this week's issue:
- Commentary: Discipline
- Feature Strategy: Dead Cat Bounces
- Tip of the Week: Who Pays?
- How to subscribe to the Stockscores.com Perspectives Daily Edition
***Stockscores.com Commentary***
What does it take to be a good investor? Many would say it is an excellent
understanding of the stock market, or perhaps a lot of good contacts. Having
access to technology and the ability to get trades filled quickly are
important. But above all else, the one thing that is more important to
successful trading is something that seems very simple.
Discipline.
Sounds simple, yet it is the greatest failing of people who lose in the stock
market. Successful traders realize that they will not be right all the time.
Many successful traders are profitable on less than half their trades. Given
these losing probabilities, the reason winners make money is because they cut
losses short and let profits run. They have the discipline to hit the eject
button when they are proven wrong. Those who consistently lose money? They hang
on for the dream
Fear of taking a loss or fear of missing out on an uptrend cause many market
participants to hang on to losing positions. So often, these traders tell
themselves that they will sell when the stock falls to a certain point.
However, when it does, they find a reason to establish a new limit. Too much
attention is paid to the story and not enough attention is paid to the message
that the market is telling.
When you take a position in a stock, you have to establish the point that the
market will prove you wrong. Whether you choose to base that point on support
and resistance levels, or the announcement of news, this point represents a bad
outcome of your trading decision. If triggered, the exit sign is flashing. Head
for the door.
Failure to take a loss when proven wrong will have two effects. First, it will
likely make a potentially small loss grow into a big one. Remember that
successful traders take small losses. A big loss takes often has a longer
holding period, so it also ties up capital. And it will take more profits to
recover.
Second, it will create fear for the trader who is seeing profit and does not
want to feel the pain of a loss again. To avoid the potential disappointment of
another loss, some traders take profits too early simply to lock in the good
feeling that comes with making a win. Unfortunately, to be a successful trader
you have to limit losses and let profits run. If you have small profits and big
losses, well, you lose.
Maintaining discipline when trading is essential for success. If you have it,
only simple rules of trading are necessary for success. Be strong, it is easier
said than done.
***Stockscores.com Feature Strategy ***
There are two emotions that move the stock market; fear and greed. A Company
announces some bad news, and the market punishes the stock lower as investors
all clamor for the exit door at once. Because of fear, the stock tends to go
lower than the news justifies, leaving room for a short-term bounce back
higher. This is often referred to as a dead cat bounce. For traders, it
presents a good opportunity to make a profitable trade.
The stock has to have made abnormal losses recently. We want to find stocks
that are trading on fear as the psychological condition of the market makes it
ripe for over extension to the downside. To find stocks that have done this,
you should use the Stockscores.com Market Scan tool to filter out all the
stocks that are down at least 25% in the past 30 days.
- Select <= -25% over the last 30 days for the filter, Gain/Loss.
Stocks that fit this strategy will have very strong downward momentum. As an
extra filter, we want to find the stocks that are oversold, as this implies
that they have gone too low. Use the Stockscores.com Market Scan tool to filter
out all the stocks that are oversold according to the Relative Strength
Indicator.
- Set RSI = Oversold.
For there to be fear, there must also be volatility. We want to find stocks
that have traded in a wide trading range today and have been volatile in the
very recent trading history. To do this, use the Stockscores.com Market Scan
tool to find stocks that have a high Volatility index.
- Set Volatility Index Today = High.
Finally, and most importantly, we want to select stocks that are showing a
Bullish candle. This means that they are closing above where they opened.
- Set Candle = Bullish Candle
I suggest you set a minimum dollar value of stock traded as well, so you can
eliminate illiquid stocks. I used a $500,000 cut off for my scan.
Set $ Value Volume >= 1000000.
When we visually inspect the charts, we want to focus on stocks that have sold
off heavily and are showing the first or second day of strength after the sell
off. Stocks that make a make a new low but then manage to claw back through the
day and close near their high are preferable. Based on Friday's trading action,
this scan revealed 31 candidates (out of the 21,000 stocks that we cover at
Stockscores.com). Of the 31, these fit the visual requirements the best:
Daleen Technologies (DALN)
Exodus Communications (EXDS)
OfficeMax Inc. (OMX)
Resmed Inc. (RMD)
Gildan Activewear (T.GIL.A)
This is a risky strategy, as these stocks have a lot of pessimism to overcome.
However, nimble bargain hunters should give this strategy a look on a regular
basis as it can reveal some profitable dead cat bounces.
***Stockscores.com Site Tip of the Week***
There are a lot of financial web sites, newsletters and research reports
available for your investment research. When you utilize these sources, you
must ask yourself whether the information your are reading is biased. Many
sources are hired by companies to promote stocks, a lot of research is tainted
by corporate finance transactions and many writers are motivated by their
ownership of a particular stock. It is hard to find sources of information that
are not biased.
Stockscores.com has no financial links with the stocks that it features. We
simply apply our technical analysis models and provide our opinions. We don't
promote, we don't own and we don't do deals with the companies that you read
about. There are other excellent sources of information available, but you
should always ask the question; who is paying for this exposure?
***Stockscores.com Perspective Daily Edition***
Each day, we scan the market for opportunities and reveal only the best to our
Daily Edition subscribers by email. Plus, we provide comments on past features
with regular updates, helping you understand how to trade these features.
A two-week free trial is available for new subscribers. To enroll, simply send
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Perspectives
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***References***
To get the Stockscore on any of over 20,000 North American stocks:
stockscores.com
For a background on the theories used by Stockscores:
stockscores.com
For strategies that can help you find new opportunities:
stockscores.com
To scan the market using extensive filter criteria:
stockscores.com
To build a portfolio of stocks and view a slide show of their charts:
stockscores.com
To see which sectors are leading the market, and the stock components:
stockscores.com
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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. |
