Written and copyright © 2011-2013 by Thomas N. Bulkowski. All rights reserved.
This article discusses a dozen stock picking tips.
About the first of each month, I search for stocks to buy, but only if there's enough cash available, of course. I wrote my own stock charting program, so features such as the
ones I describe below probably won't be available in your program. Here's a dozen items that I look for when shopping for stocks.
Stock Picking Tips: Weekly Scale
I switch to the weekly scale because it's not a scale that I use often, and it shows things I miss on the daily charts. The scale goes back to September 2001 on my
23" monitor, so I get a good view without having to scroll anything. I just press Enter for the next screen.
Stock Picking Tips: Industry
The stocks are sorted by industry, so I also get a feel for which industries are doing well as I page through each stock. A beep sounds to tell me I've moved into a new
Stock Picking Tips: Relative Strength
I also have my program set up to color the borders of the chart green or red, depending on how good the industry relative strength is. I want to invest in strong
industries, but sometimes bottom fishing in the discard bin can give good value. I usually won't discard a stock just because of a weak industry.
Stock Picking Tips: Avoid Price Mountains
Those are stocks that made a big run up and have been siding lower ever since. Intel is an example. It peaked at 75.81 in August 2000 and has been trending
lower. A study of price mountains confirms that it takes years for a stock to make a new all-time high after a price mountain.
Stock Picking Tips: Downtrend
Even if the stock does not show a price mountain, I will throw it away if price is sliding down for year or more (or less!). Why take a chance on a stock executing a turn-around when I
can find another that's already moving up?
Stock Picking Tips: Congestion Region
If the stock is moving higher, I want to find a shelf, a platform or congestion area such as the top of an ascending triangle upon which the stock sits.
I will buy as the stock climbs out of that congestion. If it's already made its move, then I'll wait for a throwback.
Stock Picking Tips: Flat Bases
I switch to the linear scale from the log scale on the price axis. That compresses the price movement when the stock makes a large move. It tends to look flat.
Breakouts from these flat bases can lead to exciting moves.
Stock Picking Tips: Target
I also look for significant overhead resistance to be far away -- like double the current price. If a cloudbank pattern exists,
then that's even better. I'm looking to hold the stock for months, perhaps years, to allow price to climb, pushing through nearby resistance. I like to see the path to a stock that might double
be free of overhead resistance, but that's wishful thinking. Still a clearly defined target that's far above the current price is what I aim for. That way, whenever I'm tempted to sell, I can
look at the target and remind myself that we're not there yet. The CHG trade was one that used a target to exit.
Stock Picking Tips: Avoid Straight-Line Runs
On the daily scale, I avoid buying during a straight-line run. Instead, I prefer to see price break out of a congestion zone as I described above. To buy when price is climbing is to invite
the run to end and retrace. That retrace may take price down far enough to cash me out, so I will wait for price to collapse before entering.
If it doesn't retrace, it doesn't matter
because I know that another trading opportunity in another stock will come along eventually. Of course, that means you can miss big winners. A number of times I picked the right stock
at the right time, but didn't buy because it kept going up. After price had tripled, I found myself saying, "If only I bought..."
Stock Picking Tips: Research Reports
I will read my favorite research reports to find out how the company is doing. This includes a look at the fundamental ratios. Is the company a value play? Does
their business have upside growth potential? I threw out Vulcan Materials (VMC) because the Obama infrastructure improvements haven't been exciting enough to push this stock up much,
homebuilding is still slow and so is the commercial side. This could be a turn around play, but buying now means I'd be locked in for months with the stock moving up slower than the indices.
I tend to throw out too many stocks because of poor fundamentals even though they have a good technical picture.
Stock Picking Tips: Insider Buying
I like to see insiders buying large amounts of shares and lots of them buying. Having one buy 30k shares is good, but it's not as good as five buying 6k shares
each and none selling.
Academic research that I've read says that if insiders buy and none sell within the past 6 months, then the stock tends to outperform over the coming year.
Stock Picking Tips: Daily Chart
Once I finish the weekly scan and get a pile of stocks to choose from, I narrow that list by looking at the fundamentals. Once that's done, I switch back to the daily
scale. There I look for entry points. I'll click on my Buy button which pastes a checklist into my computer. Items such as target price, stop price (it makes a suggestion using a
volatility stop), position size (also suggested), scores the pattern, if applicable, the next earnings to make sure I'm not buying within 3 weeks, and so on.
Once I'm filling out my checklist, that usually means I'll be buying the stock. Often it will take days or even weeks for price to move where I consider it a buy. I don't mind waiting.
Patience is the sign of a professional.
That's most of what I look for when shopping for stocks, but I forgot the main one. I only buy stocks that go up. If they don't go up, I don't buy them. Yes, I borrowed that from Will Rogers.
-- Thomas Bulkowski
Written and copyright © 2011-2013 by Thomas N. Bulkowski. All rights reserved. Safes aren't.