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Summary
Winning Stock Picks Pop up on MarketSmith Workflow Scans. Strategies, Homework, with Investors Business Daily research.
Stocks that popped up on the MarketSmith Scans this weekend should be added to the watchlist. YUM, XLNX and WPX all look sound, and are moving higher out of sound bases or solid trends.
Step One: ADX Scan, Workflow and MarketSmith Research
The scans and workflow we have developed over the years have developed into a consistent method for finding the next winning stock picks. One particular scan looks for stocks in a new trend. We use ADX for this purpose, which highlights stocks triggering when ADX line moves above 20. If ADX carries over to the weekly time frame, we consider the candidate for potential swing. Note ADX above 20 implies a strong trend, but it does not imply bullish or bearish direction. DMI lines (subject of another discussion) and common sense dictate direction. ADX supplies the strength of that trend or lack thereof.
The ADX scan produced several potential candidates with strong ADX trends. Since we are interested in bullish setups that have the potential of lasting several days or weeks, ADX is perfect for eliminating weak trending candidates while focusing only on the stocks with the best potential.
Step Two: MarketSmith Analysis – XLNX YUM
This step involves processing the chart symbols through MarketSmith, IBD or Leaderboard. We’re looking for stocks that institutions are buying, aka “fund ownership.” If institutions are buying, we assume their research departments have done their due-diligence. We like to say, “institutions have our back.”
We also want Relative Strength (RS) line moving higher, preferably in the 90 (+/-) or better level. This compares the stock in question with the S&P 500. RS line is literally RS vs. S&P 500. Our stocks should be stronger relative to the SPX.
XLNX – ADX and MarketSmith
XLNX daily ADX line broke above the 20 zone the last week of August. Furthermore, ADX strengthened as the stock formed a consolidation pattern above the breakout level near (76.75 +/-).
The weekly chart shows RS line climbing to 84, as the stock breaks out of an 8-month consolidation. Measured move or depth of pattern is approximately 15 points, so we’re targeting 95.00 (+/-). Money flow and On Balance Volume are bullish.
ADX weekly suggests a move above the 20 zone. While it is no guarantee of future performance, we would suggest given the strength exhibited in the daily and weekly charts, that the current breakout will follow through in the coming days. Once ADX weekly crosses above 20 it’s “game on” for this candidate.
We also like fund ownership increasing. XLNX MarketSmith data block shows institutions have been adding over the past two quarters. September fund ownership data will be available next week. We anticipate funds have been adding, considering the strength of its recent trend.
YUM ADX and MarketSmith
Yum Brands operates and franchises 45,084 Fast Food restaurants including Pizza Hut, Taco Bell and Kentucky Fried Chicken.
Note ADX line moved above 20 in early August. The stock quickly gained 12.5%. The point is, YUM showed up on this scan back in August. Had you acted on ADX strength > 20 in at that time you’d most likely be still in the stock as it broke out of its recent handle. Our typical 5% trailing stop would not have triggered.
YUM is forging ahead after breaking out of a cup with handle base pattern. Note the relative strength (RS) line is climbing. We want to see that line continue higher, with 99 being the strongest. Also, pay attention to “funds” data box on the right “institutional sponsorship.” These fund managers have been adding to their portfolios for the last four quarters. Money flow and On Balance Volume are bullish.
YUM Weekly MarketSmith
The weekly chart gives us additional information. The stock has been trending since June 2016. The current base gives us a potential measured move and targets for this current breakout. We also see YUM has a consistent pattern of beating analysts estimates, presented each quarter just above the volume panel. If you’re looking for a stock that will increase in price, earnings beats are a good barometer of current performance and future expectations.
ADX weekly line moved above 20 in March 2017 just as YUM broke off its base at 67.00 (+/-). ADX remained above 20 as YUM reached it peak at 87.00 (+/-) for a gain of 29.85%.
MarketSmith
We usually start the process with MarketSmith breakouts, when we are looking for new candidates. In this article we reversed the process, running a scan first then checking MarketSmith. It doesn’t matter which way you prefer, the end result is a list of stocks with the best potential considering the current market conditions. Stocks that populate our list are run through our workflow process.
- Chart and RS Iine strength
- Measure for strength of trend (ADX)
- Check fundamentals – IBD Composite rating, group strength
- Institutional sponsorship – funds adding or vacating
- Check money flow
Two energy candidates popped up on the “Breaking Out Today” list, WPX Energy (WPX) and Vistra Energy (VST). Both of these stocks look good, however, only WPX passes the ADX strength test.
The stock poked its head above its 20 week base on Friday and volume spiked. Funds are adding and ADX line is about to cross above 20, suggesting the trend is strengthening. Money flow still needs to improve. Earnings are scheduled for 10/30.
XLNX, WPX, and YUM are only three of several candidates for the week ahead. We’ll discuss the additional candidates in the members-only weekend video newsletter.
Perfecting your workflow, doing a little homework and a passion for finding the next winning stock picks marks the difference between the casual stock trader and the professional.
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Happy Trading,
Vinny
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