What does the ‘M’ in CANSLIM stand for?
Allow this post to serve as a reminder of our studies of the market in the past. I speak about the ‘M’ in CANSLIM many times throughout the year because of it’s great importance.

According to William O’Neil (www.investors.com) , it represents the overall health and direction of the major market indexes (Dow, NASDAQ and S&P 500). It is very important to understand and recognize what type of market you are in before you ever place a position (specifically trend traders). How can we realistically make money and set goals based on a blind strategy without knowing if the current market is in bear mode, bull mode, up-trending, down-trending or if it is trading sideways. The market trades sideways about 80% of the time so this leaves us with sustainable trends roughly 20% of the time. Three-quarters of all stocks will follow the general trend of the major indexes so don’t try to swim against the current.

By ignoring the ‘M’ in CANSLIM, your portfolio may get hit with losses by trading on the wrong side of the trend. Simply picture a river and understand that it is much more difficult to swim up-stream than it is to swim with the current downstream. The stock you buy may have a nice basing chart pattern and excellent fundamentals but it may come under pressure and move in the opposite direction anticipated due to the general market weakness and/or sector weakness. The same can be said in a bull market; a stock that is a sub-par performer may act strongly and give the investor solid gains due to sector strength and/or overall market strength but the gains are primarily due to sister force (in this case, a bit of luck helped your position).

Study the market and you will see that stocks move in groups and many of the stocks in a strong industry will move in tandem. The same holds true for weak markets; if you own a stock in an industry that is starting to churn or breakdown, it may be wise to pull in a portion of you position to lock in gains before the bottom drops. More times than not, the leading stock in an industry group must conform and move in the direction of the others.

As many of you know, I also use the daily new high and new low ratio (NH-NL) to compliment the overall strength that the market is presenting. The price and volume alone can fake out many investors and lead them down the path of faulty investing. In order for the market to be a formidable bull, the NH-NL ratio must compliment the general outlook and present us with at least 500 new highs per day on a consistent basis. When both the NH-NL ratio and the ‘M’ in CANSLIM are strong, we can justify placing larger positions (maximum 1-2% portfolio risk) and label the market as a bull.

William O’Neil, the founder of Investor’s Business Daily, states that many of the most profitable stocks over the past 50 years made their advances when the overall market was strong, not weak. The NH-NL ratio is always comprised of the strongest stocks in the current market and we know that these individual leaders are responsible for the bulls and the bears.

How can an investor monitor the market action to tell if it is weak or strong?

As mentioned above, the first thing to look for is a breakout of one or more of the major indexes with volume greater than average. Next, I look for the daily new high/new low ratio (NH-NL) to be entering new high territory and reaching new highs of 500-1,000+ stocks per day. In 2003, we had multiple instances when 1,000+ new highs were reached (this happened several times during the same week). Bear markets typically form when the NH-NL ratio turns negative, something we have seen consistently over the past six months.

Sideways markets are typically tougher to trade than a market that is trending in one direction, whether it is up or down. Sideways markets whipsaw investors up and down and typically cause frustration that leads to poor decisions. It may be wiser to sit in cash during an extended sideways market if your portfolio is taking consistent losses. Re-group, monitor the ‘M’ in CANSLIM and look for a new basing pattern or trend to form. Never throw good money after bad!

Coming out of a bear market (our current situation); the strongest stocks which may take the early leadership will typically have the highest relative strength ratings while confidence is still low. These new leaders will typically emerge from a few specific industry groups that are gaining strength and making gains on the heaviest volume. When a new trend confirms, the first 10-15 weeks will be crucial as the biggest winners will breakout during this time. It is not to say that additional winners can’t breakout after the first 15 weeks of a new up-trend but the odds decrease and your risk rises. When the follow-through occurs in the indexes (today, Friday, October 31, 2008 is day 4 of the current rally attempt), you must see an increase in market volume from the previous day and substantial price advances that equal or exceed 1%-2% for the NASDAQ, DOW or S&P 500. When we see two or more of the indexes follow-through on the same day, it increases the validity of the new up-trend and you can start grabbing shares in potential leaders (start with small positions in this market).

Never listen to personal opinions on the market offered by talking heads because they are usually wrong or don’t understand the key factors that decide if the market is going up or down. It is most important to understand the exact condition and health of the market today rather than trying to predict where it will be in 6-12 months. Everyone is always trying to predict where the market will be in twelve months or at the end of the year. Who the hell cares? This is a complete waste of time as investors and traders must be able to change their opinion and beliefs of the market at a moments notice.

• Is the market currently up-trending, moving sideways or down-trending?
• Did the trend just change?
• Can you see a change or did you miss the change?

If you make predictions, you may become married to these predictions and overlook major market signals. When you understand these questions, your trading results will improve dramatically. You could be the best stock selector in the world but that doesn’t mean a damn thing if you buy and sell against the trend because you don’t study or understand the ‘M’ in CANSLIM. Always know the exact direction, health and conditions of the ‘M’ in CANSLIM before you ever put on a trade.

Remember, you could be right in every aspect of your stock analysis but if you are wrong about the direction of the market, you will most likely lose money.

Everyone is an expert when it comes to the market, or at least a certified psychic. Everyone seems to think they know what’s supposed to happen, especially if you read the articles around the web and the newspapers on the stand.

You know what I think: Talking heads are useless!

Why don’t we just sit back and allow the market to tell us where it wants to go. I can’t say that expected the market to rally more than 10% or almost 900 points the exact morning I post the parameters to a pivot reversal (the article was written Monday night while watching the Titans smack around the Colts).

In any event, the market clearly marked day one of the attempted rally. No argument here.

Is it too early? Should we wait on the sidelines? Should we wait for the election? Are you scared to trade? Are you scared to lose? Are you embarrassed to be wrong?

Rule #1: Wait for a follow-through on overwhelming volume, 4-10 days from today’s 10% surge. The signal will be “buy” if we get a follow-through, so add a few shares at that time. Maybe it will reverse but we can’t think to hard about rules etched in stone, so we can only act based on the historical odds presented by this scenario. Trade small; enter a position that is 1/3 or 1/2 of your regular position size or trade fewer units but don’t sit on the sideline because you “think” this is a false move.

As I said yesterday, 20% of all moves that provide a pivot and a follow-through will fail so we do have a 1-in-5 chance of witnessing a head-fake. But that also means that we have a 4-in-5 chance that a rally can form if we get a follow-though starting this Friday and lasting until Monday, November 10, 2008 (day 10).

I’ll admit, I have many biased views on this market and it is will take a lot of courage for me to pull the trigger but I must clear my head and follow the tape, follow the price action and most of all, follow the rules.

According to some, today’s 10.88% Dow gain on above average volume was a first or second follow-through from the pivot reversal established on Friday, October 10, 2008. This is true because the Dow has not undercut the previous low during this attempted rally but the follow-through is also coming on the 13th day – outside of the 4-10 day period that we typically assign to the start of a rally. Besides, the NASDAQ did in fact undercut its previous pivot reversal. IBD has been quoted to say: “Follow-throughs that occur after Day 10 yield lower success rates.”

I don’t consider this a follow-through because we have exited the 4-10 day follow-through period and the market has trended lower with distribution days. Today is day 1 in my book, for purposes of analysis on this blog.

When does a rally attempt end? A rally ends when an index such as the Dow or NASDAQ undercuts the rally’s low. The count will restart from 1 when the next pivot reversal appears.

Don’t rush to buy stocks after a prolonged down period because stocks with quality bases will be difficult to find and they will lack ideal accumulation or entry points. Build a watch list instead. My watch list is slim because it’s very difficult to find quality candidates at this time. The best method in my mind is to look for stocks with strong relative strength ratings that are trading above their 200-day moving average.

So, let’s sit and wait to see if we get a follow-through four to ten days from Tuesday.

“Whenever I have had the patience to wait for the market to arrive at what I call a “Pivotal Point” before I started to trade; I have always made money in my operations” – Jesse Livermore, 1940

Market direction or the ‘M’ in CANSLIM as I have highlighted it in the past is the most critical characteristic to consider when investing. Seventy five percent of all stocks follow the general market averages with these numbers becoming more skewed in times of extreme pessimism (like now – 90% of all stocks are following the carnage).

Bear markets are necessary to help deflate the overvalued price/ earnings ratios and overpriced shares in times of extreme exuberance. Bear markets create widespread negativity, overwhelming pessimism, fear, uncertainty and a total lack of confidence among investors. Cash exits the stock market as people panic like sheep and prices start to adjust back to reasonable levels, paving the way to new opportunities around the corner.

We are clearly looking for a new uptrend that sustains some life with a rally on above average volume. Bear markets will provide several head fakes as they typically fall in multiple waves of lower highs and lower lows. It usually takes the majority of stocks listed on the exchanges to sell off enough that a true base can form that will propel the next up-trend or bull market.

Study the charts below for the down-waves prior to the 1982 and 2002 bull markets. I selected these two years because they represent the strongest up-trends (bull markets) following a bear market over the past 30 years.

The first rally will feature one or more of the major market indices gaining at least 3% or more on higher volume than the previous day. It is then critical for at least one of these indices to follow-through with similar action four to ten days later (preferably four to seven days later – rules from original O’Neil books).

We won’t be able to tell if the market is building a rally after the first 3% up-swing so give it time and look for at least one, if not multiple follow-throughs from the four day on. The more, the better. Markets will give head-fakes about 1/5th of the time after a true follow-through so we will pay careful attention to the number of waves down during the current bear market. We have had three waves down but only one major wave down on the DOW (it could go lower – easily, before moving higher).

See charts below for the pivot point reversals and follow-throughs for the 1982 and 2002 bull markets.

We must understand that head-fakes and multiple pullbacks are clearly in the historical descriptions of former bear markets. I don’t quite know if the current markets have had sufficient pullbacks before launching a new up-trend (see the charts of the DOW and NASDAQ from yesterday’s post).

What I can tell you is that bear markets typically end while the business cycle is still suffering. With our media, this sucker will last forever – a bunch of useless talking-heads. Why does this happen? Because the stock market is discounting events three to six months in advance (long time readers of the blog know I believe this more than most theories of the market – I consider it fact).

Whether you read William O’Neil, Jesse Livermore, Martin Zweig or Gerald Loeb, they have all confirmed over the past 100 years that no bull market has ever started without an explosive price and volume pivot reversal and follow-through.

The charts displayed today show markets with a pivot reversal and a follow-through – the exact scenario that will take place when the next bull begins and this bear comes to an end. As William O’Neil always says: “The big money is made in the first one or two years of a normal bull market cycle”

According to William O’Neil (www.investors.com) , it represents the overall health and direction of the major market indexes. It is very important to understand and recognize what type of market you are in before you ever place a position (this may not include day traders but is extremely important to trend traders). How can you realistically make money and set goals based on a blind strategy without knowing if the current market is in bear mode, bull mode, up-trending, down-trending or if it is trading sideways. The market trades sideways with only slight deviations from an average about 80% of the time. This leaves us with a market that trends up or down with sustainable swings only 20% of the time. Three-quarters of all listed stocks will follow the general direction of the major indexes which include the NASDAQ, the DOW and the S&P 500.

By ignoring the ‘M’ in CANSLIM, your portfolio may get hit with losses if you are trading on the wrong side of the trend. Simply picture a river and understand that it is much more difficult to swim up-stream than it is to swim with the current downstream. The stock you buy may have a nice basing chart pattern and excellent fundamentals but it may come under pressure and move in the opposite direction you anticipated due to the general market weakness and/or sector weakness. The same can be said in a bull market; a stock that is a sub-par performer may act strongly and give the investor solid gains due to sector strength and/or overall market strength but the gains are primarily due to sister force (in this case, a bit of luck helped your position).

Study the market and you will see that stocks move in groups and many of the stocks in a strong industry will move in tandem. The same holds true for weak markets; if you own a stock in an industry that is starting to churn or breakdown, it may be wise to pull in a portion of you position to lock in gains before the bottom drops. More times than not, the leading stock in an industry group must conform and move in the direction of the others. A perfect example was the home builders, they have moved in tandem for the past eight years. If you look at their weekly charts over the past decade, you will see that they all have the same patterns but with different numbers. The image provided is from a case study I did back in 2005. Nothing has changed from 2005 to 2008 as this industry is still traveling the same road (most recently that was down).

As many of you know, I also use the daily new high and new low ratio (NH-NL) to compliment the overall strength that the market is presenting. The price and volume alone can fake out many investors and lead them down the path of faulty investing. In order for the market to be a formidable bull, the NH-NL ratio must compliment the general outlook and present us with at least 500 new highs per day on a consistent basis. When both the NH-NL ratio and the ‘M’ in CANSLIM are strong, we can justify placing larger positions (maximum 1-2% portfolio risk) and label the market as a bull.

William O’Neil, the founder of Investor’s Business Daily, states that many of the most profitable stocks over the past 50 years made their advances when the overall market was strong, not weak. The NH-NL ratio is always comprised of the strongest stocks in the current market and we know that these individual leaders are responsible for the bulls and the bears.

How can an investor monitor the market action to tell if it is weak or strong?

As mentioned above, the first thing to look for is a breakout of one or more of the major indexes with volume greater than average. Next, I look for the daily new high/new low ratio (NH-NL) to be entering new high territory and reaching new highs of 500-1,000+ stocks per day. In 2003, we had multiple instances when 1,000+ new highs were reached (this happened several times during the same week). Bear markets typically form when the NH-NL ratio turns negative and this has not been common over the past year (at times).

Sideways markets are typically tougher to trade than a market that is trending in one direction, whether it is up or down. Sideways markets whipsaw investors up and down and typically cause frustration that leads them to make poor decisions. It may be wiser to sit in cash during an extended sideways market if your portfolio is taking consistent losses. Re-group, monitor the ‘M’ in CANSLIM and look for a new basing pattern or trend to form. Never throw good money after bad!

Coming out of a bear market; the strongest stocks which may take the early leadership will typically have the highest relative strength ratings while confidence is still low. These new leaders will typically emerge from a few specific industry groups that are gaining strength and making gains on the heaviest volume. When a new trend confirms, the first 10-15 weeks will be crucial as the biggest winners will breakout during this time. It is not to say that additional winners can’t breakout after the first 15 weeks of a new up-trend but the odds decrease and your risk rises. When the follow-through occurs in the indexes, you must see an increase in market volume from the previous day and substantial price advances that equal or exceed 1%-2% for the NASDAQ, DOW or S&P 500. When we see two or more of the indexes follow-through on the same day, it increases the validity of the new up-trend and you can start grabbing shares in potential leaders.

If the market starts to make new highs on large volume but it is not moving as high as it was during the entire length of the up-trend, it may be topping.
Sound familiar?

This is the first sign of churning and the first red flag to play tighter defense on your longs. I will immediately turn to the NH-NL ratio to gage the strength of the individual leaders to give me a glance at the broad market strength. One of the biggest black eyes that an investor can receive is during the topping of a long bull market where they made extensive gains and have emotions that are telling them they are genius.

If an investor ignores the ‘M’ in CANSLIM and holds their winners while the market tops and then starts to decline, their gains will be erased quicker than they were accumulated and their egos will be shot. Bulls always climb mountains while bears usually jump out the window. When red flags appear, such as moving average violations, support levels violated and the decline of the NH-NL ratio, it is time to lock in profits and move to cash until things settle and you can figure out what is happening. It is not necessarily the best time to short but you can begin building your watch lists for candidates that may want to join the bear jumping out the window.

Never listen to personal opinions on the market offered by talking heads because they are usually wrong or don’t understand the key factors that decide if the market is going up or down. It is most important to understand the exact condition and health of the market today rather than trying to predict where it will be in 6-12 months. Everyone is always trying to predict where the market will be in twelve months or at the end of the year. Who the hell cares? This is a complete waste of time as investors and traders must be able to change their opinion and beliefs of the market on a dime.

• Is the market currently up-trending, moving sideways or down-trending?
• Did the trend just change?
• Can you see a change or did you miss the change?

If you make predictions, you may become married to these predictions and overlook major market signals. When you understand these questions, your trading results will improve dramatically. You could be the best stock selector in the world but that doesn’t mean a damn thing if you buy and sell against the trend because you don’t study or understand the ‘M’ in CANSLIM. Always know the exact direction, health and conditions of the ‘M’ in CANSLIM before you ever put on a trade.

Remember, you could be right in every aspect of your stock analysis but if you are wrong about the direction of the market, you will most likely lose money.

Each stock has gained support along the 200-d (40-week) moving average while building their current base. The market has been moving higher but many pundits are calling this positive move a “head-fake” or slight pause in the main trend which is down (in their opinion). I couldn’t tell you if they are correct but buying stocks while they make new highs during a suspect market can be costly if it reverses. I prefer to buy stocks making new highs during an obvious up-trend. In any event, let’s go over a few technical rules for stocks building cup or saucer shaped bases.

On the weekly charts:

• Look for more up-weeks than down-weeks while the stock is building the base.
• Make sure that the volume is higher during the up-weeks than the down weeks.
• Volume should be below average or lighter during the down-weeks than they are during up-weeks.
• Stocks tend to make 3-5 bases during a long run over a few years. Be careful with stocks making late stage bases (4th base or later); they are more vulnerable to failure as most of the “smart money” (institutions) have rotated their cash into new stocks.
• Sell if a stock breaks out from a base on above average volume but suddenly reverses below the pivot point (ideal entry) that same day or a few days later.
• Beware of stocks trying to make news highs on above average volume but fail to end the day in the upper half of its daily range. This may be a reversal and a possible red flag.

Read an article I posted last January on How to Calculate a Stock’s Pivot Point:

How to Look for a Cup with Handle (chart #1):

Look for relatively quiet volume as the stock builds the left side of the cup. Volume at the base of the cup should be slightly higher than the left side as support is coming into the stock. The right side of the base should have above average volume with more up-days than down days. The handle will be the last part of the formation and should slope slightly downward with lower volume than the right side of the base. The pivot point will be slightly higher than the highest point of the right side of the base. All breakouts should occur on volume 100% greater than average daily volume although IBD does say that breakouts above 50% do qualify.

How to Look for a Saucer with Handle (chart #2):

Look for relatively quiet volume as the stock builds the left side of the saucer. A saucer looks similar to the cup-with-handle but the dip from the high to the low is smaller and usually longer in duration. Volume at the base of the saucer should be slightly higher than the left side as support is coming into the stock. At this point, the base may almost qualify as a flat base. The right side of the base should have above average volume with more up-days than down days but this does not have to be as prominent as the cup-with-handle. The handle will be the last part of the formation and should slope slightly downward with lower volume than the right side of the base. The pivot point will be slightly higher than the highest point of the right side of the base. All breakouts should occur on volume 100% greater than average daily volume.

All stocks and charts are listed in alphabetical order:

• ABB – 30.07, Abb Ltd.; building a six month base with support at the 200-d m.a. Volume is suspect.
• BIDU – 363.69, Baidu.com, Inc.; a four month base with up-week coming on above average volume with support at the 200-d m.a.
• CHL – 87.10, China Mobile Ltd.; a five month base with support at the 200-d m.a. The base would be stronger if it was more rounded, rather than “v-shaped”
• CNQR – 34.26, Concur Technologies, Inc.; a four month base with up and down volatility. Support on the 200-d m.a. but up-week volume is suspect.
• CPLA – 64.84, Capella Education Co.; a four month base with support at the 200-d m.a. Volume is somewhat suspect while moving higher.
• DECK – 142.76, Deckers Outdoor Corp.; a deep four month base that found support near the 200-d m.a. Currently moving higher on strong volume but his base may be too deep to recover this quickly.
• ESRX – 73.71, Express Scripts, Inc.; a four month base that caught support at the 200-d m.a. The stock is about to challenge new highs but volume is lacking (a red flag in my opinion).
• GHM – 57.90, Graham Corp.; a five month base that caught support at the 200-d m.a. Moving higher on decent volume as it looks to challenge new highs.
• JEC – 89.21, Jacobs Engineering Group Inc.; long time favorite of mine that is building a four month base with support along the 200-d m.a. Volume is suspect while moving higher.
• RIMM – 120.04, Research in Motion Ltd.; a six month saucer shaped base that has caught support along the 200-d m.a. Does RIMM have another run in it? This is a late stage base.

We can’t call this a follow-through on day 6 for the DOW because trading volume dipped from yesterday’s totals. The count does not reset because we have not violated the intraday low from the reversal day or day 1 of the rally attempt. Leading stocks didn’t do much to lift the market today so it is better off that we didn’t have a suspect follow-through. Rebounding financial stocks lead the market higher, not something we can hang out hats on.

Read up on the CANSLIM rules if you don’t completely follow what I am talking about when it comes to reversals, rallies and follow-throughs.

Past CANSLIM Articles:

• CAN SLIM Breakdown
• IBD’s 20 Rules for Success
• Understand the ‘M’ in CANSLIM

This idea was first revealed by William O’Neil, the founder of Investor’s Business Daily, and became a cornerstone in his CANSLIM investing method. I believe this theory to be accurate but it is not an exact science. Before I describe this method, I would like to be clear that my indicators are still pointing down and my screens are still focusing on shorts. It’s a good time to write about reversals and follow-through days even though I don’t think this rally has legs but my opinions must be checked at the door.

The key to understanding this follow-through philosophy is that reversal signals usually occur after a significant market correction, not a minor market correction. The reversal and follow-through in 2003 was classic and one I like to refer back to when looking at the present market. Both the reversal and follow-through days must move at least 2% to the upside on above average volume.

If today acts as day 1 of a possible reversal, then the next two days are not very important except for one fact: the market must not undercut today’s low as that would kill the start of a new rally. As long as prices stay above today’s low, the rally attempt is safe.

The follow-through day should come within four and ten days of today’s reversal although O’Neil’s original rules stated that the follow-through should come between day 4 and day 7. One of the major indexes must move higher by 2% or more on larger volume than the previous day to qualify for a follow-through. Multiple indexes participating with a follow-though shows conviction that the market has sustainability to move in the new direction.

As IBD states, the method is simple but has been tested through time to be reliable. It’s not perfect but the odds state that a follow-though day signals a new trend for the market.

Take a look at the reversal and follow-though from March 2003 (keep in mind that this market action happened after a significant market correction; we aren’t in the midst of a significant market correction).

The market gained more than 70% from its follow-though confirmation.

I don’t believe we are in the same situation as 2003 but we must remain neutral and allow the market to tell us what will happen. All things considered, I will add put contracts to current positions that rise on weaker volume and fail to recover moving average lines. I will hedge my contracts if they do mange to recover the moving averages. All in all, I will be ignoring the major news networks and mainstream newspapers this week.

I have (privately) screened several potential shorts over the past couple of months but this market is not ready to roll over just yet. I was early with my shorting analysis in 2006 so I do not want to make the same mistake in 2007. However, more and more stocks seem to be building bases like the ones from the bubble burst in late 1999 and early 2000 (examples in the charts provided).

When I short stocks, I look for longer term trends, not short term swing trades (rarely ever day trades). The shorts I want look like the charts in this post (they take months or even years to complete). I want the high flyers that will be crushed over the next several months. Just as I like riding trends higher, I like riding trends lower over the intermediate to long term (4-12 months). I am trend trader at heart and it is what I do best.

We will have bounces to the upside over the next few months and the Fed will try to stop the bleeding but the stocks that are due for crushing blows will be dealt those blows eventually and we all can profit from them. Stocks may move 20%-50% (in both directions) at times so be careful. I will spend the remainder of the week posting up charts that look ready to become long term losers. Charts similar to the examples below. Give the charts time to form, be patient because many of these will look to move higher at times (as soon as this week and next) prior to their inevitable fall.

Complete Blog Post Repeated from October 15, 2007:
The title of the post is borrowed from the book “How to make Money Selling Stocks Short” by William J. O’Neil. It’s an ideal book for investors that focus on trading longer term trends and don’t necessarily do this for a profession (i.e.: day traders).

The book contains some excellent strategies for finding prime shorting candidates or stocks that are about to enter a declining stage that may offer excellent risk/reward setups for buying put options.

(CLICK FOR LARGER IMAGES)

I consider several of the techniques in the book to be reverse CANSLIM? Study the charts from the past that have setup ideal shorts and then screen for those same characteristics in stocks trading today. Many of the ideal shorts from past market declines have held the reverse characteristics of an ideal CANSLIM stock (that you would want to buy).

Many traders believe that the most obvious area to place a short would be near the peak of stock’s trading range but studies have found this to be untrue.

Characteristics of Longer Term Trend Shorts

• Most ideal longer term “trend” shorts take four to twelve months after the peak price to setup on the weekly chart with the majority of these shorts triggering between six to nine months.
• Look for stocks that had prior up-trends and support levels that can now act as downward resistance or entry areas.
• Once a stock tops and starts to consolidate, you want it to slice through the 50-d moving average and then the 200-d moving average.
• A crossover between the 50-d m.a. and the 200-d m.a. is ideal and is graphically presented on each chart in this post
• The odds of success increase with each failed attempt for the stock price to recover these major long term moving averages.
• Head and shoulder tops can also serve as ideal setups for potential shorts if they take at least five months to develop.
• A decreasing relative strength line and a negative pattern on the point and figure chart can also confirm that the stock is rolling over and setting up an ideal short.
• Finally, volume should be increasing and the stock should be under distribution as it violates the major moving averages and starts to break former support levels.

No one knows when this market will roll over so study the ideal characteristics now so you are prepared to recognize them when they appear. I have (privately) screened several potential shorts over the past couple of months but this market is not ready to roll over just yet. I was early with my shorting analysis in 2006 so I do not want to make the same mistake in 2007. However, more and more stocks seem to be building bases like the ones from the bubble burst in late 1999 and early 2000 (examples in the charts provided). Until this market turns, I will not be posting up short candidates to the blog as I am not a market top predictor.

This bull could go on for another year – who’s to argue that? Do you have a crystal ball?

As the chart examples show, numerous shorting opportunities will appear giving the longer term trend trader adequate time to enter a position (no need to rush).

For further reading, see my two part article on shorting and the book by O’Neil – the charts alone are worth the price times 10!

Shorting Stocks – The Basics, Part I of II

Shorting Stocks – The Basics, Part II of II

I also recommend:

All Daily Screens on this blog come from one of the eight scans I developed and described in detail in the post: Fundamental Screens and Scans

So far, the two scans below have been giving us the most opportunities in the market.

1. Quality Stocks with a new IPO within the past two Years
This screen scans for high quality stocks that have debuted to the market with the past two years (IPO’s).

• Earnings Per Share (EPS) Rating: Greater than or equal to: 30
• Relative Price Strength (RS) Rating: Greater than or equal to: 30
• Market Capitalization (MM): Greater than or equal to: 100.0
• Current Price: Greater than or equal to: 10.000
• Current 50-Day Average Volume (1000): Greater than or equal to: 100
• IPO Date: After 2006

2. Institutional Sponsorship Increasing
This next screen looks for high quality stocks that have increasing institutional fund sponsorship from one quarter to the next. As you know, this is very important for any stocks I cover and then buy. Every case study on this blog includes detailed institutional sponsorship analysis.

• Earnings Per Share (EPS) Rating: From 60 to 99
• Relative Price Strength (RS) Rating: From 60 to 99
• % of the number of Mutual Funds Owning for Current Quarter vs. Prior Quarter: Greater than or equal to: 10%
• Stocks trading at new 52-Week High and Percentage price is below 52-Week High: From 0 to 15
• Current 50-Day Average Volume (1000): Greater than or equal to: 100

Enjoy the free week; the tools are excellent for all CANSLIM, swing, trend trading and buy-at-new-high investors.

• I start by analyzing the fundamentals (accelerating earnings, sales and ROE) by using a combination of several screeners on the web to narrow down my list of quality fundamental stocks. The custom screen wizard from Investor’s Business Daily is one of my favorites.
• Next, I study the charts (technical analysis) and look at every stock screened. I pay particular attention to stocks that are poised to move and especially stocks with potential to move quickly. I am a trend-trader by nature but I have no problem making swing trades when the reward heavily outweighs the risk.
• I could never buy every stock that makes the daily screens but I try to include only stocks that look poised to make a move for those of you interested in buying certain candidates. The daily screen is just an equity research list, not an automatic buy screen.
• Finally: No investor is perfect and losses are part of the game when it comes to Wall Street. You must understand that these daily screens give us stocks that will allow me to maintain an expectancy to come out ahead each year. I will have as many winners as I do losers on these screens but I will only take the best risk-to-reward setups and will execute my game plan so the winners are consistently larger than the losers. This method is profitable if you follow the basic rules and control your emotions.

In order for my screening method to work, the “M” in CANSLIM is the MOST important aspect to the system’s success. For those of you not familiar with CANSLIM, the M stands for market health, if the market is weak, DON’T BUY long. No matter how good the fundamentals and technicals look, stocks will have a high risk of failure during weak markets.

I don’t discriminate when a stock makes my screens; I include every qualifying stock even if I personally don’t like the company. Emotions must be tossed out the window and facts must be the only aspect analyzed, even if you don’t like the product.

My daily screens look at the current day’s action and screen for stocks that are making new 52-week highs, building solid patterns, breaking out from a pivot point or trending higher with a favorable trade setup. Stocks that have already broken out or have made past daily screens can continue to make future daily screens even if it sits above the pivot point or ideal entry area. I prefer to continuously track quality stocks as they pass crucial buy points because trending stocks typically go to make new highs or higher highs. Daily screens have the tendency to present many different stocks but only the best of these stocks will go on to make multiple lists. Stocks that make multiple lists must be looked at for trade setups.

Further Daily Screen Details:

• My screening methods have one secret that others don’t: There is no secret; therefore, anyone can succeed to build a profitable system but it’s the mind that you must learn to control (your emotions).
• I start all searches by looking for stocks with superior fundamentals based on specific criteria (typically related to a CANSLIM methodology. After fundamentals are established, look I determine if the stock trades within a strong industry group. Historically, similar stocks move in the same direction (this is fact not opinion). This is not to say that every stock in the industry group will move higher or lower because a sister stock is going in that direction (a generalization rule of course). After the industry group has been confirmed strong or weak, I then determine if the overall market is in a specific trend (up, down or sideways).
• An average night (after market data only) will give me a list of about 50-150 stocks that meet my specific fundamental criteria. These screens can return 500 to 1000 stocks per day during a strong bull market.

Key statistics to use in fundamentals:

• Earnings (current, past: quarterly, yearly and future estimates)
• Sales (current, past: quarterly, yearly and future estimates)
• Return on Equity (ROE)
• Price/Earnings Growth (PEG)
• Price/Earnings Ratio (rise over time of base)
• Debt/Equity
• Assets, Liabilities
• Accumulation/Distribution ratio
• Up/Down Volume over past several months
• Number of Institutional Holders (is this increasing or decreasing recently)

Key things to use for technical analysis:

• I study the 1 year weekly chart for trends
• I study the daily chart for trade setups and exits
• Favorable risk-to-reward setups
• Properly forming bases
• Pivot points
• Breakout areas
• Extended stocks
• Stocks pulling back to key support lines
• Check volume action when bases are formed
• Use Point & Figure charts for support and resistance areas
• Resistance zones, etc…

Daily screens will become a large part of this blog staring this month so please leave feedback and I will always develop the research towards your likes and dislikes. Daily screens were one of the most popular tools I used on MSW and I have no doubt they will become very popular on the blog. Maybe tomorrow will feature the first daily screen…