In the past ten years stock scanning has become very popular but designing a good stock scan is just the first step. As many of you know I spend a good part of each Saturday and Sunday running as well as reviewing my scans.
Unless it is the end of the month my weekend focus is on scanning a basket of stocks to find those to put on my buy and sell list for the week ahead. The stocks are selected using a combination of momentum, volume, relative performance and chart formation criteria. Developing a list of positive and negative weekly stocks is just the first step in my weekend scanning routine.
Whether I focus on the buy or sell list is dependent on my analysis of the market's trend. This trend analysis is determined by a combination of factors though the trend of the NYSE A/D line plays a large role. Volume, moving averages and $VIX analysis also go into the equation.
On the weekly chart I have highlighted periods where the trend turned from positive to neutral. When the slope of the weekly A/D line is rising strongly then it is time to be an aggressive buyer of stocks as often tighter stops can comfortably be used.
During periods when the market's trend is rated as neutral then both long and short positions are considered but a more cautious approach is employed and fewer positions are taken. Of course when the market's trend is negative then only the short trades are taken.
In examining the weekly charts, the stocks that stay on the buy list need to have rising relative performance that is above its WMA. It is important to find stocks that are acting stronger than the Spyder Trust (SPY) for your buy list. As stocks that are outperforming the SPY continue to move higher their out performance will encourage more buyers.
The weekly OBV is also reviewed closely to be sure it is reflecting accumulation. If the stock has just completed a bottom then bullish divergences in the OBV are a further reason to buy.
As I look at the weekly charts I discard from the list any that have moved 15-20% in the past couple of weeks. This is because a good risk/reward trade is unlikely in these stocks as they are too far above support. Also stocks that have moved back to a prior weekly high are also eliminated as the upside potential may be limited.
Those stocks on the sell list are examined in a similar manner. Those stocks where the weekly relative performance is below is WMA or show divergences are favored as they are likely to be the weakest in a market decline. A weekly OBV that is below its WMA is also a key selection criteria as is negative momentum.
Another part of my scanning process is to track those stocks that have formed weekly dojis. For those that are in an uptrend I then track the doji low for signs of a turn while the doji highs are watched for those stocks in a downtrend. Of course daily dojis are also important as the SPY triggered a positive doji signal on September 30th before its powerful rally.
Most traders realize that this candle formation is a sign of indecision so that weekly closes above the doji high or low are often significant. During a five week period last summer Hormel Foods Corp. (HRL) formed a series of weekly dojis with the highest doji high of $58.16.
On July 31st HRL closed at $58.98 which was above all of the doji highs. This positive signal was supported by the strong weekly relative performance that had just made a new high. The weekly OBV was also positive as it was well above its rising WMA.
For those who buy on the weekly's close above the doji high can use a stop under the week's low. In this case it mean buying at $58.98 and since the week's low was $56.66 a stop at $56.37 would have been appropriate. This was 0.5% below the week's low. HRL dropped as low as $58.28 the week after it closed above the doji high but traded as high as $63.88 four weeks later. By the end of the year it had moved above $79.
Often times after an extended rally a stock will form a weekly doji that is accompanied by bearish divergences in the technical studies or a clear loss of upside momentum. This often sets up a good selling opportunity. Subscribers to Viper Hot Stocks get a list of Nasdaq 100 and IBD Top 50 stocks each Monday that have weekly dojis that I am watching.
After a stock passes the weekly test then I look also at the daily chart and technical studies to see if there is a potential trade that has a favorable risk/reward.
For example, Facebook, Inc. (FB) turned up on my buy list on June 5th as the Friday close at $82.14 was above the highs of the prior three weeks. The tight range on the weekly chart was a sign that the risk on new longs could be well controlled.
The volume increased on the higher close. The weekly relative performance had moved above its WMA the previous week and had turned up sharply. The OBV had moved above its WMA four weeks earlier and showed a bullish zig-zag formation.
The potential upside target was the weekly starc- band at $87.48 while the weekly resistance, line a, was in the $90 area.
On the daily chart the first think I noticed that a doji had formed the day before the positive weekly signal. This sign of indecision allowed for a pullback over the near term. The daily relative performance broke out to the upside two days before the weekly buy signal as the resistance at line c was overcome. The daily OBV was also above its WMA on June 5th.
From the daily chart the safest stop was under the May 12th low of $76.79 (point 1) while there was secondary support at June 1st low (point 2) at $78.66. The close was above the 20 day EMA at $80.64. So the first buy level was just above the EMA at $80.86. Another 50% would be bought at $79.19 which was the previous weekly close.
A stop under the low at $78.66 could be too tight as an intra-day decline could take prices briefly below this level before FB rallied. A stop at $76.33 would have meant a risk of 4.6% on the entire position. FB consolidated for two weeks with a low of $78.66 before FB turned sharply higher as it hit a high of $89.40 by the end of June.
One stock that showed up on my sell list at the end of 2015 was CDW Corp (CDW). The stock had spiked to a high of $46.81 in November but then drifted lower as it dropped to its 20 week EMA at the end of December.
The weekly starc- band was at $39.06 with the 50% retracement support at $37.09. This is a reasonable downside target but there is much stronger support in the $35-$36 area. The weekly RS line has dropped below its WMA (point a) consistent with a top. The weekly OBV divergence at the highs, line b, was is a sign of weakness.
There is minor resistance at $42.40 with the declining 20 day EMA at $43.06. A stop needed to be at least at $44.77 which was above the five week high. Therefore the strategy was to go short at $42.40 or better with a stop at $44.77 which had a risk of 5.6%.
The next day CDW gapped lower to open at $41.41 and by the end of the week had declined to the $39.50 area. Therefore the order to sell was not filled but in my trading experience the odds do not favor chasing the market. The most consistent gains from looking to sell rebounds in a downtrend or to buy on a pullback in an uptrend . Therefore I would still be looking for rally in CDW to sell as long as the market's trend stays negative.
I hope these insights to my scanning process will help improve your stock trading. If you are a stock trader you might consider my Viper Hot Stocks . The Monday report features my weekly scan results and recommendations. This analysis is updated very Thursday and intra-day emails are also sent to client when needed . It is just $34.99 per month and can be cancelled anytime on line.