Selection of Trades By Identifying Buying and Selling Pressure

In formulating your daily trading plan, you should select from a universe of stocks that have the following characteristics:

1. Strong relative strength
2. Overweighted by the Generals
3. Volatility (good average daily range)
4. Higher priced stocks (minimum 50, better >75)
5. Liquidity (average daily volume >700,000)
6. Program Trader (you get added acceleration if your stock is part of program trading for the S&P 500 and the NDX 100)
7. Advancing phase (above 200-day MA)

This will give you a universe of liquid big-cap stocks that form more defined patterns and enable you to better identify the buying and selling pressure of the Generals. It is much easier than trading smaller, less liquid stocks that can be extremely erratic and lack liquidity and sponsorship.

To select your stocks, you should start with the TradingMarkets Stock Scanner. I have included two simple screens that I use to find strong stocks in the momentum phase, which is what you are looking for in daytrading or short-term position trading.

Screen I: Technical and Fundamental

1. Closing price >= 75 and <400
2. 50-day average volume >= 750,000 shares (remember the StockScanner expresses volume in hundreds of shares, so enter this figure as "7500")
3. EPR >= 80
4. RS (three month)>= 80
5. Closing price >20 MA, >50 MA, >200 MA
6. DMI = UP

This screen run for 9/22/00 produced the following 11 stocks: (BRCD | Quote | Chart | News | PowerRating), (BRCM | Quote | Chart | News | PowerRating), (CHKP | Quote | Chart | News | PowerRating), (CIEN | Quote | Chart | News | PowerRating), (CPN | Quote | Chart | News | PowerRating), (IDTI | Quote | Chart | News | PowerRating), (IWOV | Quote | Chart | News | PowerRating), (JNPR | Quote | Chart | News | PowerRating), (NEWP | Quote | Chart | News | PowerRating), (PDLI | Quote | Chart | News | PowerRating) and (VRTX | Quote | Chart | News | PowerRating).

All of the stocks had excellent moves on INTC Friday, especially from Fading Volatility Bands. Check your daily charts of each stock on the list to view the various pattern setups which is the starting point. You would then move to the intraday charts in anticipation of early entry prior to a continuation entry above the previous day's high. This screen gives you strong RS stocks with earnings (EPR) in the top 20% of all stocks in the database.

The second part of this screen is just changing the closing price to >= 50 and <75. All of the other criteria remain the same. This adjustment gave me: (BEAS | Quote | Chart | News | PowerRating), (BA | Quote | Chart | News | PowerRating), (PALM | Quote | Chart | News | PowerRating) and (RATL | Quote | Chart | News | PowerRating).

Screen II: Technical

1. Closing price >= 75 and < 400
2. 50-day average volume >= 750,000
3. R.S. (three month) >= 90

Note: DMI is ALL, as is the closing price comparison to the moving averages.

This screen produced 29 names which included some of the market psychology stocks that haven't reached the earnings phase yet but have strong RS: (ABGX | Quote | Chart | News | PowerRating), (AMCC | Quote | Chart | News | PowerRating), (ARBA | Quote | Chart | News | PowerRating), (AZA | Quote | Chart | News | PowerRating), (BRCD | Quote | Chart | News | PowerRating), (CIEN | Quote | Chart | News | PowerRating), (CMRC | Quote | Chart | News | PowerRating), (CPN | Quote | Chart | News | PowerRating), (EMLX | Quote | Chart | News | PowerRating), (EXTR | Quote | Chart | News | PowerRating), (FRX | Quote | Chart | News | PowerRating), (IDPH | Quote | Chart | News | PowerRating), (IDTI | Quote | Chart | News | PowerRating), (ITWO | Quote | Chart | News | PowerRating), (IWOV | Quote | Chart | News | PowerRating), (JNPR | Quote | Chart | News | PowerRating), (MERQ | Quote | Chart | News | PowerRating), (MMCN | Quote | Chart | News | PowerRating), (NEWP | Quote | Chart | News | PowerRating), (NTAP | Quote | Chart | News | PowerRating), (PDLI | Quote | Chart | News | PowerRating), (PEB | Quote | Chart | News | PowerRating), (PHCM | Quote | Chart | News | PowerRating), (PPRO | Quote | Chart | News | PowerRating), (SEBL | Quote | Chart | News | PowerRating), (SWCM | Quote | Chart | News | PowerRating), and (VRTS | Quote | Chart | News | PowerRating).

Now go through the daily charts of the additional stocks on this list and observe the setups past and current.

You should also run Screen II for the 50 to 75 group.

If you simply lower the RS to >= 80, the list of names will expand. You can also change the closing price to less than 20 MA which enables you to find pullbacks to the 50 MA and sometimes the 200 MA.

When looking for stocks that are overweighted by the Generals, I strongly suggest you scan the N-30D SEC filings that large mutual funds must file twice a year. This will give you a good look at the top holdings of each fund in addition to sector weightings. It lists all the stocks held by each fund. There is a time lag for the reporting period, but you will get a good feel by checking their stocks during the reported period vs. now. These N-30Ds go back to 1994.

You can view these SEC filings by going to the following site: www.dailystocks.com

1. Scroll down to 13-D filings (left side)
2. Select Full Database and ALL forms
3. Highlight Mutual Fund choice
4. Submit choice
5. Click on most recent N-30D

By reading the N-30Ds of various funds, you will get some insight to portfolio strategy and specific attributes of specific stocks.

In addition to your various individual screens using the Stock Scanner, it is beneficial to review all of the stocks in the S&P 500 and the NDX 100. By doing this, you will see which stocks and sectors are moving and how broad any advance or decline is. I do this every day to find potential trades by identifying the buying and selling pressure in each stock and then checking the daily charts for setups.

Some screens on the site, starting with the S&P 500 and NDX 100, will enable you to identify high probability trades for all of the key institutional stocks.

Each day, there is a dynamic struggle between buyers and sellers and your job is to select those stocks that show the buyers to be dominant for your longs and the sellers for your shorts.

In identifying this pressure, you must look at:

1. Price -- and where it closed in its daily price range. Did it close above the midpoint of the range and was it above or below the VWAP (Volume Weighted Average Price)?
   
2. Total Volume -- and how it relates to its 30-day average volume and to the past five to 10 days' volume. The Generals show their intentions with volume and volume will almost always precede price on the buy side but declines will often start on light volume and then accelerate.
   
3. Daily Range -- when a stock advances with an expansion of range, it usually indicates buying intensity when looked at in relation to Price and Volume. You should also look at the daily range vs. the 10-day average range.

When you are looking for pattern setups on the daily charts, you should focus on the ones that clearly indicate buying pressure (sells reversed). This means that Price, Volume and Range should be in sync.

Ideally, I look for an expansion of range, increase in volume relative to a 30 or 50 day average, increase in PX and a closing price in the top of the range. It is also very positive if the closing price is above the VWAP, which it normally is on a close in the top of the range.

Most technical services will indicate that it is bullish when a stock advances for the day on increased volume. That is how OBV (on-balance volume) is calculated. This is often true, but if you don't take into consideration the closing price relative to the daily range, how can you know it wasn't actually distribution or whether the buyers or sellers dominated the trading? If I intend to enter long from a continuation pattern, it will be when I recognize that buying pressure is dominant.

For example, a stock opens up 1 point due to the S&P futures, trades up 3 points during the session, then closes in the bottom of its range but still up 1 point on the day. It also traded 50% more than its 30-day average volume. If you didn't look at an OHLC chart and heard it on TV, it would sound very bullish.

The reality is, this stock is actually indicating distribution as the daily close is near the bottom of its range on increased volume even though it's up a point on the day, but down from its high by 3 points.

If you were looking at OBV or a similar indicator on an interday basis, it would appear bullish but on the intraday bar, it is bearish. Don't enter a short-term trade unless the intraday bar for that day was actually bullish to indicate that the Generals might come for the stock again on the following day.

This type of scenario happens often when the futures are advancing on some economic or related news, buy programs are in effect, which enables the Generals to scale up their sell orders.

As the stock advances, the Generals try to sell more stock, but by now the buyers back off at the higher levels and the Generals will try to sell more stock but they drive it down in the process. If the market looks okay, they will walk away and let the stock close up that one point on the day in hopes of higher prices the next day.

Institutions will always attempt to scale up sell orders and down on buy orders until market conditions dictate otherwise. Buying and selling pressure changes dynamically day to day and minute by minute and that's what all traders must learn to recognize when selecting trades from the daily and intraday charts.

When you look at a narrow-range day that closes up on significant volume but because there is no expansion of range, it means a seller(s) has shown up to supply the buying interest and usually precedes a trend change or pullback (sells reversed).

That simple OHLC bar and volume tell a big story but you must listen and understand the dynamics.

The Index screens include all the necessary data to enable you to identify the buying and selling pressure for all of the major institutional stocks in a brief time frame. In another lesson, I will take you through the actual selection process as we can all view the same data.

Good trading!