Sunday, February 04, 2007

Here's how a stock can make it to my watchlist: sector analysis

The most frequently asked question I receive is some variation of how I find the stocks that make it to my watchlist. My senses tell me that most of those asking these questions expect that I have some magic formula I plug in that spits out stocks that fit the setups I trade. While I know many traders that do use very specific scans to find stocks to trade, I use a much different approach. I look at charts. Lots of charts. Probably too many charts. At the least, I probably look at over 100 charts a night. Most nights, it's a lot more than that.

That's not to say I go to a list of stocks, start at AA and work my way to ZZ. I use a variety of resources to view charts that are likely to yield setups that I like to trade. As I've mentioned before, one of my favorites is's Industry Ranking. I'll guide you through my process by showing you how X (United Steel) made it to my watchlist.

I start off by pulling up the top 10 sectors over a given period of time. In this case, I'm looking at the strongest sectors over the past 15 days.

Metals Fabrication has been the best performing sector over the past 15 days, so I start with charts from this sector. Only four of the 12 stocks in this sector show up because of the filter controls I set (average volume above 300,000 and stocks must be above $10).

After eyeballing these charts, I see that X (United Steel) looks like it may have broke out from a cup and handle. If this is the case, it would make my watchlist as a "cup and handle pullback" setup. Just as it sounds, I go long if the stock successfully tests the new support area (other criteria, such as volume, also need to be met).

Upon closer review, the stock has broken out of a cup and handle and looks strong technically, making it a good pullback candidate. I'll keep a close eye on this stock and do some further analysis. For example, I'll check to see how this stock and sector historically handles cup and handle breakouts.

I repeat this exercise for the remaining top 10-20 sectors. I then do the same thing for the bottom 10-20 sectors, looking for short setups. Once completed, I will have viewed 50-100 charts. I then move on to other sources for watchlist candidates. Some of these include: high volume stocks, 52 week highs, the usual momentum stocks I track and other blogs.

I could go a different route and just have a filter spit out stocks I need for my setups, but I don't think I could be successful using that method. Viewing all these charts gives me a good feel for the market. I have a good idea of where money is flowing and I can see patterns emerging that I might not otherwise catch.

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Anonymous said...

What service are you using to pull up the top sectors over a certain period of time?

Rahul said...

I also extensively use sector strength to pick stocks out for entries. And this use of gives me another quick method to find some possible setups.

Thanks for sharing.