Stock Screens Tell You What You Want, but Charts Don't Lie

04/02/2015 6:00 am EST

Focus: STOCKS

Gregory Harmon, CMT

Founder and President, Dragonfly Capital Management

Although Greg Harmon, of Dragonfly Capital, admits that in a strong trending market, a scanner can find really good stocks, he illustrates that by looking at the charts of individual stocks without the use of a screen or scan, a trader can see which stocks are truly set up for greatness.

Every week my process starts with a review of the macro trends in the market. As a top down technician, this sets the tone for me whether I am looking for a long-term position or a short-term trade idea. Most stocks (maybe even 80%) move with the trend. So if you find the trend and understand where it is going and what risks it might face, you are more than half way towards understanding the easy path for the market and stocks.

Most people understand that in theory but it is so surprising how many do not follow that in practice when they trade or invest. I see so many traders or investors that want to short a stock in an uptrend. That particular stock might be ready to move lower, but why do you want to spend your time looking for a needle in a haystack? And how long will your trade work in a countertrend? I could spend a lot of time on this but that is for another day.

Recently, another aspect of looking for the major trend has been a conflict on time frames. With the long-term trend remaining higher, the short-term trend has not always been so clear. If you trade in the indexes then you can adjust your time frame for trading or just sit out when this happens. But if you buy and sell individual stocks, you have another tool. The actual stock charts themselves.

In the age of technology, many traders have embraced it to ease their workload. There is nothing wrong with using tools to lighten the load. But in doing so, you may miss many of the nuances that individual stocks can reveal. Running a scan to find your watch list for the week or month is simple these days. Search over the 200- and 50-day SMAs with rising and bullish RSI and it…spits out your focus list. In a strong trending market, that is a great short cut.

Some that use scans and screeners say I am an old timer. I do not use them. In the early days of Twitter, people used to ask how I scan and I would reply that I use a proprietary H2i scan. When pressed, I would reveal that stood for Harmon’s 2 eyes. I look at every chart in my universe. And this week it was quite useful.

As I said earlier, in a strong trending market, a scanner can find great stocks. But then, since 70-80% or stocks move with the trend, did it really find the great stocks or just really good stocks? By looking at the charts of individual stocks without the use of a screen or scan, you can see which stocks are truly set up for greatness. And, in markets with a less defined trend on all time frames, can give you even more information.

My macro review this weekend gave me the sense that the short-term trend was mixed and the indexes could see consolidation. But the individual charts showed something quite different. There were a lot of stocks that were ready to make moves to the upside. I would not have seen that using just scans.

The indexes were mixed, but individual charts said the bias was higher. As a result, my watch list of 11 stocks showed ten of them breaking out to the upside Monday. I do not say this to toot my own horn, but to suggest that you take the time to understand what information the charts have to give you. And what information you are missing when you let technology help you with short cuts.

By Greg Harmon of Dragonfly Capital

Related Articles on STOCKS