I am writing this post primarily to teach my students how I search for potential rocket stocks–stocks that have been launched and appear headed towards new peaks. As I said in class this week, it makes the most sense to buy stocks that have the best fundamentals and technicals. This strategy has been advocated both by Nicolas Darvas and William O’Neil in their extraordinary books (listed at lower right of this blog). Darvas, made a fortune trading in growth stocks in the late 19050’s and said that he liked to buy stocks that were trading at all-time highs and that had already doubled in the past year. So, I am going to show you how I use the great TC2007 stock charting and analysis program to find potential rocket stocks that I research further before buying.
For the first time since early November, there were more new lows than new highs in my universe of 4,000 stocks on Friday. Furthermore, the Worden T2108 indicator is getting near the level (below 20%) where declines sometimes end. Friday was the 11th day of the current QQQQ short term down-trend. We are either at the beginning of a major decline, or near the end of a short term correction. The best course for me is to wait for the market to tip its hand. The GMI remains at
I recently attended a Worden seminar about their new software, StockFinder.com, which will eventually probably replace TC2007, my favorite analytic program. While there, they talked about the free software that they make available to everyone, Freestockcharts.com. Freestockcharts.com is a platform that is very similar to their new StockFinder software, but it is free and provides real time charts and statistics. While many sites provide intraday prices, I learned at the seminar that Freestockcharts.com has an indicator called “volume buzz.” Volume buzz compares each stock’s volume to its average volume at a specific time during the trading day. (I do not know over how many time periods the average is computed.) So, for example, at 10:05 AM I can rank my watchlist by how each stock’s current volume at 10:05 AM compares with its average volume at 10:05 AM.
I can therefore see anytime during the day whether a stock is trading an unusually high or low number of shares. Volume buzz therefore enables someone to spot unusual volume in their specific watchlist anytime during the trading day. One just edits the watchlist column to include volume buzz. The picture to the right, taken after Friday’s close, shows that the volume for TYH on Friday was 85.7% above its average total trading volume by the end of the day. Of course, if I had taken a screen shot during the day, the volume buzz statistic would have been computed based on the exact time during the trading day when I would have taken the screen shot. Pretty neat!
Freestockcharts.com also enables me to set alerts for each stock, that can be emailed to me immediately when a stock trades in a specific way. (A larger number of alerts and stock scans require a paid for premium service.) Check it out. Meanwhile, the GMI is at 5 and the GMI-R is at 9. The indexes are still near the top of their Bollinger bands and it may not be a great time to start taking on new longs. But as long as the longer term trends are up, chances are that the daily advance will resume suddenly. When stocks surge on good earnings, like AAPL, AMZN and NFLX did last week, we know that we are in a strong up-trend where funds and traders are buying strength. The QQQQ and SPY index ETF’s have closed above their critical 10 week averages for 15 straight weeks. It is unfortunate that so many people have missed this rise. One needs to follow the trend and not try to second guess it. As long as the trend is up, I can go long and manage risk by placing sell stops beneath key support levels.
When I teach my class to honors students I find that the biggest mistake they make in trading is buying a stock when it is too extended from support. They buy when it is extended and then sell as it falls back to support. I did that a lot until I reviewed several losses and discovered that pattern. To make money, all I had to do was to reverse my actions–buy where I had been selling and sell where I had been buying. But how can one do that effectively?
Many of you have requested that I post a chart showing the recent performance of the GMI over the past year. The GMI, though not perfect, has successfully kept me on the right side of the market through the 2000-2002 and 2008 bear market declines. I simply go to cash in my university pension and trade the short side in my IRA once the GMI starts to remain consistently below 3. In order to show the GMI over time, I have plotted a weekly chart with the GMI changes for the last day of each week.