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.
A rise in the QQQQ on Thursday and Friday will likely turn my trend indicator up. Wednesday was the 18th day of the short term down-trend. However, there were 167 new highs in my universe of 4,000 stocks on Wednesday, the most since January 21. And 53% of the Nasdaq 100 stocks closed above their 30 day averages. With the indexes up against their key moving averages, it remains to be seen whether they will break through this week. With many growth stocks getting stronger, I suspect this market is going higher. The key is to not jump the gun, however, but to wait for confirmation.
While the short term down-trend is still in place, a lot of stocks I watch are gaining strength. And surprisingly, short term rates are starting to rise, perhaps in anticipation of a recovery in the economy. First, note that the GMI-R, which is more sensitive to short term changes, has risen from 1 to 5 (of 10), while the GMI is now back to 2. As the table below shows,
Last October, I wrote a post showing that in the market’s rise, 70% of the top 10 stocks in the IBD 100 list outperformed comparable stock indexes. Well, I repeated the analysis for the top ten stocks in the IBD 100 list published on 01/11/2010. I compared the closing price of each stock on the Friday before Monday’s list was published to the closing price yesterday, on 02/09/2010. I am a big fan in buying IBD 100 stocks in a market up-trend, but was still very surprised by these dramatic results.
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