Validea is an advisory service which assesses stocks based on the investing criteria of many of the ...
S&P Stock Scanning Update
04/08/2010 1:00 pm EST
Our February 25 edition of Trading Lessons discussed the results of a stock scan that I conducted using data as of the close on February 19. The methodology I discussed was a process where all stocks in the S&P 500 were scanned, first using weekly data, and then this subset was scanned twice using different criteria based on the daily data. After this process, 24 stocks were selected. I then reviewed several of these stocks in detail, including my analysis of how one might determine a good risk/reward entry point. Since the market has had a nice run since the original report, I wanted to first see how the list did overall and then evaluate how my entry methods would have fared.
The table above shows the 24 stocks, their opening price February 26 (the day after the lesson was released), the closing price on April 5, and then the net change. With the very positive benefit of a strong overall stock market, two were flat and the rest were up during this period. Many were up significantly more than the 7.2% gain in the S&P 500, but the average gain was 7.8%. Because of the stock market’s positive trend, these stocks did not dip much below the opening levels of February 26. As one can note from the list, they represented many different industry groups, with the greatest concentration in the defense industry. Let’s take a look at a few of the stocks.
If you take a look at the stocks on the table, you will notice that many had recently completed either weekly or daily continuation patterns. This is one of my favorite trading setups because it allows you to create a well-defined area of support, find a well-defined stop level, and calculate upside targets. Let’s look first at Darden Restaurants (DRI), which bottomed in November 2008 ahead of the major average and then rallied above $41 in late April before turning lower. Over the next seven months, it formed a continuation pattern, lines a and b, as DRI retraced just over 38.2% of the previous rally. The volume was quite low in late November before DRI turned higher and completed its continuation pattern at the end of the year. The breakout was confirmed at the end of January 2010, line 1, when the OBV moved through resistance at line c. Three weeks later, DRI was picked up on the scan (blue arrow). It has already reached the 127.2% extension target from the April-to-November correction. (Editor's Note: On April 7, 2010, Darden was recommended on CNBC's Fast Money by Dennis Gartman.)
Tyson Foods (TSN) looks similar as it also bottomed in late 2008 and peaked in May of 2009, just after breaking the long-term downtrend, line a. The correction was shallower in TSN as it held above the 38.2% support level, which was a bullish indication. On the weekly chart, you can see that over the following 30 weeks, it formed a triangle, lines b and c. The weekly OBV turned higher in November, surpassing its WMA and forming a bullish pattern. The triangle was completed the week ending January 9 with a close at $13.89, and by the end of the month, the OBV had moved above strong resistance at line d. It is relevant to note that as the overall market was correcting from the January highs, TSN was moving higher. When the scan was run, TSN was already in a solid uptrend (blue arrow) with the OBV confirming the price action.
Lesson Continues on Page 2|pagebreak|
In the original article, I discussed potential entry strategies for a few of the stocks. These were methods that I have used successfully for many years with individual stocks, futures, and forex. The methods combine pivot point and Fibonacci analysis. I start by determining a stop level with which I have a high degree of confidence. Then, if the close is not too far above the weekly pivot, and the daily chart looks strong, buying midway between the close and the weekly pivot can often give you a better entry point. If the daily or weekly chart looks vulnerable on a short-term basis, then buying either between the pivot and S1, or between S1 and S2, is often a better strategy. Of course, the danger is that it can often leave you on the sidelines, as was the case with both Becton Dickinson (BDX) and Home Deport (HD) as neither entry point was hit. As you can see from the table, neither BDX nor HD is up much from the February 26 opening. Unfortunately, more often than not, I have been left in the dust by trying to cut the entry price too tight.
AK Steel Holdings (AKS) was another stock that showed up in the scan, and in this case, the buying zone seems to have worked, though AKS is not yet up that much from the entry price. After the scan (see arrow), my analysis of the daily chart indicated that the correction from the January highs was not complete and that despite the strong readings from the weekly studies, more time was required. Therefore, the hypothetical buying zone was determined by using the midpoint between the weekly S1 ($22.25) and S2 ($21.14), or $21.70, and combining it with the hourly Fibonacci support levels. This allowed me to target a buying zone between $21.15 and $21.69, which is identified by the blue box on the hourly chart. On February 25, when the Trading Lesson was released, the low was $20.50, and the following day, the low was $21.25. AKS then surged to a high of $25.24 before once again correcting, making a low of $21.39 on March 22. Now it appears that AKS has finally completed its longer-term triangle formation given that resistance, line a, has been overcome.
The last stock I would like to look at is Pepco Holdings Inc. (POM) as it is a good reminder that patience, along with continual monitoring of one’s buy candidates, is a necessary part of any trading strategy. After the scan was run (blue arrow), POM traded between $16.58 and $17.40 for the next 29 trading days. The recommended zone to accumulate longs was at $16.85, which was half way between the weekly pivot and S1. As indicated on the chart, this level was hit many times during the 29 days, but any drawdown during that period was small as neither the recommended wide stop at $15.57 or the tighter stop at $16.37 was hit. Now POM has moved through resistance at line a, which is positive as it completed the trading range, lines a and c. The major 50% retracement resistance is at $20.50 with the 61.8% resistance at $22.90.
I hope this update reinforces the usefulness of a scanning approach when trading or investing in individual stocks. In the initial article, I should have also emphasized that after the scanning process, I also do careful analysis of the individual charts. The scanning process can also help you focus in on a particular industry group as in February, I failed to pay enough attention to the relatively large concentration of defense-related companies on the list. Also I want to acknowledge that several readers commented that Finviz.com allows quite a bit of technical and fundamental screening capability on their free site.
Related Articles on STRATEGIES
The Roman philosopher Seneca wasn’t talking about the stock market when he wrote that “T...
The Dow Theory was originally referred to as “Dow’s Theory,” since it was based on...
When stocks are selling at valuation extremes and consumer optimism is at one of the highest levels ...