If I could
put it into one word, one word that could describe what it takes to
be successful in most any endeavor, let alone finding quality breakouts, that
word is: preparation. I am not talking about any old
preparing. I am talking about intense, meaningful preparation. I try not to
leave too much to chance.
My preparation happens on the weekend and every night. I am not just talking
about looking at charts. I am talking about getting specific.
First off, I cast a wide net. I have three monitors that have thousands of
stocks listed. The list is not just in random order. Stocks that are up are in
green, stocks that are down are red. I also have the stocks separated by groups.
This allows me to quickly see which areas of the market are outperforming or
under-performing on any given day. I have the screens labeled to also separate
the stage of action certain stocks are in.
That means I have a:
1) Breakout and breakdown page
2) Gap-up and gap-down page
3) Updated new high and new low list
4) Volume page -- which stocks are up or down on more than average volume
5) Short page
6) Setup page
6) TradingMarkets TradersWire
I am constantly adding to and subtracting from the lists. It is amazing that
through these lists I can actually get a feel for the markets. For example, when the breakout page expands, I often conclude the markets have
a better-than-average chance of going higher. When a bunch of leaders start to
top out (like they did in April 2000), I think it may be time to head for the
hills. When a bunch of names in a specific group break out
(like Homebuilders in
August 2000), it usually tells me to look for powerful moves to the
upside.
When I put the Mommy and kiddies to sleep, I hit the charts. My nightly work is
easily the most important work I do. The main reason for this is that the
markets are closed and stocks have stopped trading. All is quiet. There is no
more watching for changes intraday. It is at this point I start to nail my
setups for the next day.
Starting on Sundays, I take out my Daily
Graphs and spend a minimum of three hours looking for stocks with my
specific buy criteria. Those three hours give me a great overall view of the
markets. Every night, I am on Daily Graphs Online, combing through all
the big-volume movers and stocks that are poised to break out. It is a constant
process that never stops. Some people would call it tedious. I call it play .
I have a very strict checklist that I go through. Typically, I can knock out a lot
of names very quickly. The first thing that would knock a stock out is poor
technicals. I would not have any tolerance for stocks with poor technicals. Here is a list of reasons for crossing out a stock:
-
Poor technicals.
-
Lack of volume: I need a minimum of
250,000 shares traded.
-
Price: I very rarely buy stocks
under $12 -- and actually rarely under $20.
-
Poor industry group: I have found
that at least 75% of buying a stock is buying in a group in an uptrend. It
is very hard to swim upstream.
-
Very poor fundamentals: I will not
look at, for instance, a Biotech company with no revenues, even if it is
acting well.
-
A poor market: If the general
market is against you, it is very hard to make any progress.
I stay very strictly to these
criteria. It does not pay to cheat. The markets of 2000 and 2001 have only
served to prove this point.
Then the narrowing down occurs. I am not interested in just any stock. I want
the strongest stock in the strongest group with the strongest high-volume
breakout. Why settle for the mediocre? On any given day, you can find lots of
names -- but show me power and I get excited.
My criteria for a breakout are:
-
A long
base -- the longer, the
better. I equate it to the "rubber band effect." The farther you
pull it back, the more potential for a big move.
-
A
tightening of the base as it
approaches its pivot point -- I want to see a stock trade between $30 and 40
and then rush up to the top of the base. I would then want to see it trade
between $37 and $40 before breaking out.
-
Monstrous
volume -- I want 3x, 4x, 5x...
average daily volume on the breakout. (Keep in mind for bigger-caps,1.5x
volume usually does the trick.)
-
The market is in a confirmed
rally.
Throughout just about all of 2001, the markets remained in a downtrend.
Therefore, it was imperative to recognize that the wind was in your face.
-
Leading
group -- as I said before, it
is not enough one stock can buck the trend of the rest of the group.
-
Relative
strength -- studies have
shown that the biggest moves have come off of stocks that were already
outperforming.
It is Monday at 10:45 a.m. I have been
watching XYZ Corp. for the last two weeks. IIt has been trading in a tight range
with $30.10 the pivot point. Average daily volume is 1 million shares. It hits the pivot point and amazingly
it has traded 750,000 already. The group is in fine shape...the market has confirmed a rally. What do I do? Simple! It's time to take action.
Depending on how good the market is, purchases can be initiated.
There will be times where I scale in
and times where I have great confidence...so I buy full positions. That is where
I close my eyes, hold my nose and pray. You see, just because everything is
perfect, it does not mean that the stock will work. You can't have any
preconceived notions about what happens tomorrow.
Just remember: After you buy one of
these great looking stocks, always go back to the reason you bought it. If it
was the technicals -- and the technicals fail -- you have one job to do: Get
out! That will be the one major lesson every investor -- as well as
myself -- needs to take away from the harrowing markets of 2000-2001.
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