The watch list for the week is populated with more bullish setups than usual, so let us examine one or two candidates for analysis and highlight the reasons why “this is a good setup.”
First, keep in mind the majority of candidates typically come from the weekly IBD50 list. Each week, “IBD’s flagship screen of leading growth stocks gives you 50 companies showing strong relative price strength and top-notch fundamentals. Before you decide what stocks to buy, always check out these new and innovative stocks that historically far outperform the S&P 500.”
Watch List for the Week of 01-16-2017.
Stamps.com Inc. (STMP) is a good candidate to start with, as this stock exhibits criteria we like to see in a bullish set up. Earnings are late February. Additional notes are on the chart.
First and foremost, always ask yourself “before” taking on a new position, “where is price relative to the 9/20ema? Hint: you can use any period you like, so long as you have a short and intermediate term average.
Why is this important?
The moving averages are literally telling you, during the past nine trading periods, the average or net value of trades were bullish. The resulting effect is price is above the 9ema.
We are breaking out from recent consolidation. As we consolidate, Bollinger bands contract, then expand, signifying increasing volatility. This helps to propel our stock, instead of watching it languish or flat line. Additional momentum indicators will guide us in a bullish or bearish direction.
Why is this important?
As stocks advance they must refuel or consolidate, in order to gain higher prices. Analogy: a military campaign cannot proceed indefinitely without refueling and replenishing its troops and mobile support.
Stochastic is turning and was recently below 20 and rising.
Why is this important?
Analogy: Stochastic measures the momentum of price. If you visualize a rocket launched into the air – before it can turn down, it must slow down. Momentum always changes direction before price. Read that again. Stochastic will change direction “before” price!
Important concept to understand:
Momentum and the changes in the dynamic between buyers and sellers, supply and demand, is one method of determining when it is safe to enter a trade and when it is smart to exit.
Stochastic is designed to portray velocity of direction, by recording each close compared to the previous candle and its proximity to the high or low of that reference period. As price closes each period, ever closer to the high/low of each subsequent candle, momentum and price begin to shift in that direction.
MACD is crossing. Analogy: like stochastic an object will slow its momentum before changing direction. The difference is MACD uses moving averages to record this change, rather than price.
Why is this important?
The MACD oscillator shows the bears have lost the momentum game. We can tell when momentum is shifting and position accordingly. If momentum is shifting to bullish (histogram) we stand to profit more on bullish setups.
Finally, please note SAR triggered a buy signal on Friday, as price triggered a signal when it pushed through the string of overhead dots/resistance at 117.50.
Why is this important?
PSAR triggers a buy signal when price moves through overhead resistance. Note the small dots above price action, thats SAR. If you are a new trader, using PSAR can help you with the question(s) “when should I buy and when should I sell?” This indicator produces a buy and sell signal. The small dot below price tells us we are on day one of a recent buy signal. We use this for confirmation, as price already moved above the 9/20ema, our initial long signal.
When a trader sees a candidate that meets these criteria, her probabilities of success are much greater. While each entry has a 50/50 chance of moving up or down, these criteria assist in determining which causal relationship(s) will move the stock in a predetermined direction.
CARB met all of these criteria recently, responding as anticipated. Note the angle of ascent in RSI and where price is relative to the VBP support and resistance levels on the left side of the chart. Note on the watch list we highlight that CARB needs to pullback to the 9ema for a proper entry, if you missed the break above the 9ema last week.
Note SAR issued a buy signal ten (10) trading periods earlier. The orange dots below price are now a visual trailing stop. Look at previous occasions, where SAR trailing stop caught up with price in September, October and again in November. If you’re having trouble with swings, this change will answer the question of when to sell. Try it, you might like it. 🙂
We would be remiss, if we didn’t note the SOTEMA in every chart you trade. The “Slope of the EMAs” will give you a hint as to the degree of momentum in a trend. Look at CARB May through November. Note the slope of the 9/20ema was constant and 30-45* at times.
The steeper the slope of the 9/20ema the greater are your chances of success in following the trend.
This was Phase II (from my book) the “markup phase.” This phase typically lasts the longest. We anticipate pullbacks will be supported in this zone. In mid-November the trend stalled after a brief “Phase III” signaled distribution at the top. Phase IV followed, as the markdown period took over. Now we see the moving averages crossing over, with price above both. Phase II is starting.
Why is this important?
If you can distinguish where you are in the scheme of a trend, your likelihood of success will increase dramatically. Remember “Phases” are the cycles where we decide to go long, short or stay flat. Phase II should be obvious, when you want to start a new long position. Starting a long with price below the 9/20ema as we enter Phase IV will blow up your account faster than a bear can run in the woods.
Finally, if market internals confirm, you have done your homework.
If you have a bullish mindset always take a stock that is above the 9ema for starters. Watch for RSI near lows and turning higher, with stochastic and MACD confirming. Look for momentum to be changing direction. Choose stocks with great fundamentals, as well as technicals.
As a new trader, I would read this post several times until you really get what I am saying here. Use these criteria everyday to increase your probabilities of success as a trader.
Leave your opinion at the door, after all “Price is King.” Opinions do not matter.
Happy Trading – Vinny
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