Avoiding Extended Stocks

PYX

One of the crucial fundamentals of swing trading is avoiding extended stocks.  But what qualifies as extended and how can one quantify that?  In some cases it is transparent.  PYX is one such example which is up over 100% within a 30 day frame.  When things aren't so clear what is an extended stock may be answered with, it depends.

Frequently attempting to quantify relationships in trading is a chicken/egg scenario that may end up quaking like a duck.  Attempting to find a hard and fast rule to define extended stocks may lead to a dogmatic assessment of the information provided by a stocks price action.  As with many trading questions, it is better to look inward than outward for solutions to this problem.

Suppose one’s metrics show an average holding period of 5 days and an average position gain of 8% over that time horizon.  Within these parameters a stock up 10% over the past 5 days already exceeds one’s avg. gain over holding period.  Under differing parameters this may not be extended at all, but within the prism of one’s actual results this may qualify.  Taking this trade would be under the expectation that price appreciates 20% within a 10 day time period.    At the time of this writhing there are 107 stocks above $5 with daily volume of 100K that are up 20% over 10 days.  Not only would the hypothetical trade exceed what one’s metrics show, under current market conditions it may also be a low probability.

Knowing this, scanning for stocks that have not had a significant move over one's average holding period will lead to stocks that are not extended.

CHRS

Another technique is to remove price entirely and look for flattening price zones using a MA that makes sense for one's holding period.

CHRS 10-Period MA

Metrics based analysis helps take the guess workout of what is or is not extended.  Using one's data and stats as the floor from which to build one's trading foundation will lead to actionable information.  Coupled with analysis of how the market is structured and behaves will help build out the frame.

#STUDY: Data Driven Trade Idea

During the market doldrums I uncorked an idea that I had a while back but was unable to trade successfully.  I had shown myself that it was a profitable system but I couldn’t internalize it and become a profitable trader using it.  I still firmly believed there was an edge and decided to investigate once again.  

I began with questioning why I was having difficulties trading this system to begin with.  Upon inspection I realized that I was overly optimistic as to how many stocks I could track.  My first step in the process was to reduce the numbers of stocks observed to a more manageable number through stricter filters and focus on just four.

The next step was to address where I was having issues with trade management.  I realized that I was using too much size for my experience level and opted to trade small over a sample of approximately twenty trades and document a number of price action metrics that occurred during the duration of the trade.

Trade Sample.

Trade Sample

From this I had the following results.

Metrics

Of note is that after 18 trades, this system as implemented made 0 dollars.  Literally 0 dollars.  I was stopped out for maximum loss on 4 of these trades.  50% of the sample hit the low of the day.

The question I wanted to answer is what adjustments could be made for this system to be profitable.  As I’m already trading small, I dismissed reducing risk through positions size as an option.  Only 4 of 18 were stopped out.  With only 20% of the sample size being stopped out I dismissed moving this up — for now — particularly since moving the stop up to the low of day would increase my being stopped out 100% due to 9 of 18 clipping the low of the day. 

Given that I was comfortable with the current trade risk and stop level I looked at selling into strength.  While top ticking is a foolish pursuit, since this system is intraday it’s the only metric I have.  Using the top tick of the day I determined the price differential from my entry.  This averaged out to $1.52.  I adjusted prices from $1.52 downward to a level I concluded didn’t choke off the trade potential too soon yet also captured profit.  Calculating this I accepted that a $1 trailing stop would capture an acceptable profit to make this system viable.

From Marginal to Profitable

With this information I will pursue another sample of trades, collect further data, and use these metrics to refine this system further, making one adjustment at a time.

Scanning For Resiliency

After a significant daily decline I begin my research for the next wave of market leadership using a simple TeleChart scan for anchored momentum.  Currently there are 634 stocks populating this scan.  Should there be a deeper pullback this number will surely prune further leaving a select few candidates to focus on during the next upturn.

Anchored Momentum March 21, 2017

Creating the scan is very straight forward with TeleChart.  Simply create a condition:

PCF Condition

Then create an easy scan to rank by the top 15% plus other desired parameters.

Easy Scan: Anchored Momentum Price > 3

Debug Your Charts

Lately I've returned to coding and web development.  One of the things I started to dwell upon is how debugging a program relates to trading.

Bug Free

The above image is a Ruby file.  It runs and is bug free.   In order to get this to perform an actual task the trade offs begin as each character added increases the functionality but also the possibility of introducing a bug.

Perfect Chart

The above image is a stock chart.  It runs and is bug free.  In order to get this to give us actual information the trade offs begin as each added data point and indicator increases the functionality but also the possibility of introducing a bug.

This chart is actually...

Chart of AAPL

How does our perception of this chart change by introducing just one piece of information, the name of the company?  Is the chart suddenly more bullish?  Do you think of the laptop you might be viewing this on or the phone ringing in your pocket?  A simple name on a chart can result in attachment, belief, or bias.  In other words a potential bug.

Organized Trader- Using Google Spreadsheets and Gmail

Over the past year I've taken some time away from the markets to place more energy and focus on other goals and passions.  As I entertained these endeavors I mostly ignored the market.  When I did take a glance I started to make analogies.  I continually asked if there was a trading lesson to be learned or if what I was studying could relate or enlighten me in some way about trading and how I traded.

When I returned to my market studies the most important things I realized was that I am much better off ignoring the market as much as possible.   I didn't want to obsess over finding trading candidates on a daily basis.  I didn't want to log into my platform every half hour to an hour to see what may have triggered or how much a trade moved in my favor or against.  Another important realization was that my holding period was too short.  I was never really giving my trades enough time to work out and choked off positions much too early.  When I resumed actual trading I made a 20 trade commitment to a plan that addressed both of these realizations.

One of the first things I did was look at this as a problem solving exercise.   I started to think about what tools I could use to achieve my objectives and then a process loop on implementation.  The first thing I settled upon was avoiding daily chart analysis in preference of weekend analysis.  I would run my scans searching for candidates and then whittle this down further to a hand full of higher conviction anticipation trades along with a secondary list of setups for break outs.  Once I have these candidates I map out their entry/stop/size/targets using Google Spreadsheets.

Google Trade Sheet

Once I have my candidates I then set alerts on my platform to be emailed .   I have a Gmail account set up specifically for trade alerts that I have synced to my phone.  These emails set out the parameters of the trade so I can either fire off one from my phone if I'm mobile or log into my platform.

Email Alerts

Having done this for the past few months I've gleamed some insight, truth, and wisdom, along with a dose of reality and humbleness.

The most important awareness this process cemented with me is trading isn't Pokemon and I'm not going to catch them all.  This may well seem obvious but looks can be deceiving.  What I now had in front of me is concrete evidence in real time of triggered trades.  With this data I could now ask myself questions at the end of the week.  Was I in a trade from my overall watch list that performed the best?  If not then why?  Did I take all of the anticipation trades that triggered?  Again, if not then why?  The biggest benefit of this was demystifying the left of the chart.

Past studies of stocks can give the belief that they are catchable and that we as traders could have made the best of them and now will do so moving forward.  While it's eye catching to see stocks move up 100% or more over a short period of time it's important to take caution of all that glitters.  While these are absolutely worth investigating and filtering through one's methodology, they can also leave a false impression.  By having time stamped data I now know which one's I entered and can know in real time if I missed a big mover because my capital was already tied up, or if I may not have been trading that week, or price may have run too fast too soon by the time I could hit send.

Come the end of the week I will walk through my overall watch list and take note of what stocks moved the most and what refinements I can make with this knowledge.  I also go through those that triggered but failed and those that failed completely to maintain a balanced perspective as well as pertinent information about the overall health of the market.

Another awareness I came to was expectation.  Two key pieces of information I keep track of are the number of stocks that hit 2-1 or 20% over my holding time frame.  This assist me in managing my exit plan.  This could be the difference between taking off my full position at 2-1, taking off half and riding the rest over my time stop or 20%, or gunning for a full 20%.

Are my stocks triggering?  Monday morning 6:35 PST with four alerts pinging tells me a completely different story then Wednesday afternoon an hour before market close with one finally triggering.  I may consider that worthy of a pass.  It also informs me whether I might be willing to go full margin by the end of the day or take some break outs before the close.

This year my commitment to trading will be putting in the leg work on the weekends, ignoring news and noise, refining and filtering the process, and removing myself from the market as much as possible during the week.

Using Results to Determine Robust Markets

Suffice to say there are many analogies between poker and trading.  Knowing when to shift gears, probe for information and feedback, and press edges or sit out are common themes between the two.  As a swing trader using timing techniques to gauge market health, improving my awareness on a daily basis is a priority.  Avoiding periods when errors are induced and compound instead of capital is frequently in my thoughts.  Being alert to whether a market is robust or not on our horizon has a direct impact upon our returns and bottom line.

All the data we need to quantify this is available in our own records: our average gain, our average stop level, and our average holding period.  Knowing this we can scan our stock universe and determine how robust the current period is.  For example, assuming our average gain is 2R and our holding period is 10 days we can scan our universe for stocks that have had moves to this extent (whether dollar amount, percentage or a combination of the two) over 10 days.  In doing such a scan over a 5 and 10 day period I have a return of 58 and 126 stocks respectively.  As I trade 3 month momentum, stocks that meet this requirement over 5 days is 25, and 85 over 10.

Robusto or Busto Market?

The significant of using this approach is that I am merging my personal trading data with corresponding stocks in my universe that meet the same criteria.  In a robust market I should expect to see a much larger result set than I am currently.  So, clearly if my average expectation is being meet by such a small number of stocks, I in turn should not expect to achieve typical results.  if anything I should be concerned of the other spectrum of consequences by trading in this environment.   

Our Trading Data Lies to Us

We are only as good as our data source and our data source is often inconsistent if not outright misleading.  I’m not 100% sure if realizing this earlier would have improved my trading but I understand it now much more vividly and it has altered my approach, especially in stock scanning.  One would think that the most simple of data points, a stocks float, would be constant across multiple providers, but it’s not.  Ex: SNCR- 18.2M from TeleChart, 34.4M from FinViz, and 21.15M from Yahoo.

What about volume?  Well, TeleChart’s volume is provided through BATS and often TC rounds, so 2.4M today, 2,363,466 from FinViz, and  2,364,181 from Yahoo.  And keep in mind this is just the known volume on the session and does not include dark pools so we can assume it’s probably much higher than any of these numbers. And Price?  Our charts deceive us here as not every price tick gets recorded and this results in the fact that the days high and low may not be accurate not only because of dark pools, but sub-100 lots will not register a tick on the end of day chart.

What about earnings? Today FLDM had earnings and ThinkorSwim has an estimate of -0.18 with an actual of -0.15. Briefing has and estimate of -0.13 and an actual of -0.04. Now I understand how analyst estimates can be site dependent, but the actual result should have no wiggle room what so ever.

Trading is a game of incomplete information and so is our trading data.  This can effect our entire trading plan from our vehicle selection and which stocks enter our universe and which do not based upon our scans as well as the criteria we use to build them.  This can effect our entry signals based upon which source has the most current and up to date information let alone the most accurate.  This can effect what type of alerts we use and what combination of criteria they are based upon.  This can effect how much we choose to micro-manage our trading.

What I’ve taken from this realization most is acceptance that there is an inexactness to trading and to release the tension of perfection in making sure I have the best candidates to trade. I no longer worry that I have the most precise entry requirements.  When price runs through an alert but it never triggers and I lose profit as a result of not exiting at my target or my stop runs slightly and my loss is larger, I’m much more at ease in letting it go.  In other words I’m learning remove precision, allow for sloppiness, and be OK with keeping it simpler.

Non-Horseshit Stock Advice

Back in my younger days when a Tonka truck could stop a Mack truck and a Japanese die-cast robot shot a projectile that could put your eye out, things weren't so much child safe as child approved. After all, what were parents going to do with their brats when they're at the casino or the track but find the arcade or playground to dump their children off at. It was on one of these trips that I first laid money down on a pony. I was about 6 or 7 at the time and the only experiences I had with a pony prior to this was eating paste and dog food, or having a photo taken on one by some guy going up and down the street taking pictures of kids on his miniature pony and returning sepia prints for a few bucks.

Suffice to say my horse won and while I wouldn't say I was hooked, I have made trips to the track over the years. Eventually I even developed a ritual. I'd pick up the next day's Racing Forum and head off to a bar to peruse the races over a couple of beers and take notes and mark down races of interest. I'd pick out which horses had speed and which horses tended to lay off and close in the last few furlongs then envision how this might play out.  On the train ride down to Bay Meadows I'd carry my dog eared copy of Bukowski The Most Beautiful Woman in Town and read the short story "Non-Horseshit Horse Advice" for its gems and wisdom. .

Before the race started I'd head down to the paddock where over time and through acquaintances I'd begun to develop a keen eye for the equine ass and could pick out which horse had legs and which horse was taped up and looking a little gimpy, and which horse was agitated or had a little too much sheen. Occasionally I might come across a friend of my dads who had some intelligence to pass my way. There's always tips at the track.

Overtime I begin to pick up on the little clues about track internals and note which jockey/trainer combination is best, which jockey tends to get the best rides and is the consensus track favorite. At Bay Meadows it was Russell Baze and good luck trying to get some odds on this mounts. I also picked up on some of the tactical themes like how the horse you like is in a higher stakes race down the line and might just be using this as a practice run and the jockey is going to lay off the pace so perhaps it's better to look at another. Sometimes it might be a horse brought down from another state and this is a step up in competition or in some cases a step down so should be viewed in this context. Perhaps the horse was a feisty colt last race and is now a gelding.

With the amount of time I've spent at the track however, I've never heard anything along the lines of: I like Winsome Lonesome in the 5^th. The filly is coming off a solid trend and has just had a 0 line MACD cross and isn't overbought on the RSI. One would think that if ever there was a place made for technical analysis it would be at the sports book. Most TA is based off of price and volume so surly substituting total amount of purses and total amount bet on this horse's races could substitute. Alas, I've never heard of any such talk.

Come to think of it, I've never heard any TA talk outside of the market. I've never walked into a sports bar during an NBA finals and heard a conversation go:

“Who do you like in this game?”

--Well Bob, I like Durant's cross over.

“Yeah, he's been working on his dribbling technique, hasn't he.”

--No Bob, I mean his ADX cross is showing some positive momentum and there's the OBV confluence in his points per game, but I'm having a little issue with his PT/F ratio.

“PT/F ratio?”

--Points per foul, Bob. It's overvalued right now so I'm expecting a drop in performance this game because he's likely to get into foul trouble early and benched for long periods.

So here's my non-horseshit stock advice. Be careful when starting out the technical analysis route because if it is as meaningful as claimed it would be applied in every day life more often than it is --if it is. More importantly, be doubly careful when using formulas used in every day life and applying them to markets. I recommend simply this, first learn how markets work, learn their mechanics, their internals and their structure. There is no doubt there are people who use TA successfully as part of their set ups and make a ton of money, but anyone going this route must fully understand what it is before applying:

ADX Formula

Well Everybody Knows

There will always be people with better and more accurate information, and have the ability to process it quicker and act upon it faster than I can. There will also be people who get this information from the inside and sometimes from the bearded mouth himself. We know from documentation that the FED would talk their book to Goldman Sachs which allowed GS to in turn position themselves accordingly. We also know the back pockets of politicians hold a lot of greasy dollars and their not immune to passing off policy information before votes are cast.

We know that there are typically two times when a stock gets downgraded, after it has dropped from $100 to $8 is usually a good time, and the other time is when a stock is clipping new highs; not that the stock is too expensive mind you, it's just that someone else wants it cheaper. This is how the game is played so there's no use crying about it. However, that doesn't mean there isn't something we can do about it and yesterday was a good example of what to pay attention to.

Going into yesterday the major indexes had strong moves of over 1% with many closing near their highs. It looked at the time like constructive action as price action was firming and the higher low was being confirmed. Then the gap down hit the open and the markets began to hemorrhage clipping that higher low and at one point being down as much as 1.5%. Clearly this looked ominous and suggested to me at the time the June 04 pivot low would be in play over the near term. But a funny thing happened.

Buy Buy Buy

Going into the close the buy button was hit and the indexes back tracked and the Russell actually closed higher for the day and near the previous day's close. Now I can't know for sure if someone in the EU was talking their book or not, but if I was Merkel I might want to put on a little hedge position and make sure some were positioned to take advantage of the situation in a manner that was beneficial for Germany (especially after that poor performance!). Knowing this or not is not important to me, but what is important and a valuable lesson from yesterday is improving my awareness of these little nuances when the indexes flip intraday from blood on the streets to just a flesh wound.  It might take me a day later to get the picture, especially when I was too busy watching the German back field get shredded like Parm, but I'm a bit slow at times at times anyways.  

Perspective

Sometimes changing the view leads to new perspective.  Same chart, different horizons.

Hack Your Trading

A Green Shoot

Today a blip of green flashed across my timing signal. It's the first shade of green seen in a month, but I stopped trading long before that. If there is one thing I have improved upon in my trading it's avoiding the down turn and preserving capital. Having spent the past week going over my trades again looking for inconsistencies one constant has stood out repeatedly, giving too much back during down swings by trading through them and not having enough discipline to just step aside and let things work out. This time when my signals began to flip one by one I didn't wait for them all before stopping myself out of the market and sitting on my hands.

Suffice to say it's been frustrating being benched but instead of being demoralized by the thought that it may be weeks or months before the market aligns properly with myself I opted this time to put the energy into working on my weaknesses and spend more time improving my leaks and working on my analysis and planning, and process and method.

I also realized that I had reams of information scattered all over and that there was a lot of wasted effort and energy that could be streamlined so I started investigating Evernote and scoured Life Hacker and reading books about habit formation and modification to make critical changes to my trading plan. Instead of having notes flying around in journals and spread sheets and word documents I now have a central space to migrate the information so that is much more clearly presented, more easily accessible and mobile, and more focused and to the point.

Often there are things we know we do and wish to correct but the pattern is so ingrained we do so without thinking --habitually. We've heard the phrase “Practice makes perfect,” and Mark Minervini coined “Perfect practice makes perfect,” and I've gone a step further with “Perfect practice makes perfect permanent both good and bad. (completely pilfered from various sources)”  One of the patterns I wished to break was my improper use of a web browser. It is necessary when trading to have access to it, but one of my problems was I was perfecting and making permanent a bad behavior by distracting myself with sites I didn't need to view. I've known for some time this was an issue but never found a means to break the cycle since I had to use it, but how to wisely?

After checking out a Life Hacker book from the library I found my solution- site blockers. Now I have certain sites during certain times locked down and once they were no longer accessible I no longer even typed them in because I knew nothing would happen. Over night the input and stimulus that would other wise cloud my views, opinions and judgments, were dismissed because they were no longer accessible. Immediately one distraction that kept me from using my time more wisely disappeared and hopefully I'll instill a better habit of productivity and not avoidance of what I choose to be doing, but that's another life hack.

Slim Pickings

Since January I've run the same scan 5 days a week to generate a watch list to peruse before each trading session.  From this list I use a few filters to whittle down to a manageable number to focus the most attention to after the opening bell -usually 6.  I've found selecting my stocks in this manner to be beneficial because my scans are based upon known anomalies in market structure which allows me to quickly move through my universe and select stocks based upon probability stacking; additionally  it helps keep my subjectivity down to a minimum.  

Over this period I've also noted another benefit that was not obvious to me at the time -increased market awareness.  In repeating the same scan consistently I've noted the differences when my list is robust with a plethora of opportunities and when my list begins to dry up like a lake bed.  Currently my list is looking like it suffers vitamin deficiencies.

24

What I have to start this week off is a list of 24 and even that is misleading as some of these are buyouts.  Given that I generate this in a quantitative fashion, other than the criteria of the scan there is no interference on my part in the generation of this list.  What this in turn allows me to do is have a stop gap to my general market bias so when my mood becomes too bullish or bearish I can use this process as a filter.  Coming into this week my general bias is neutral learning towards negative and currently my watch list isn't disagreeing with this sentiment.

Looking Forward by Looking Back

For a period of time Guppy Multiple Moving Averages captured my imagination and I spent a godly amount of hours analyzing them. One of the main problems I now realize I had at the time was content sans context. While I understood the core nature of trend trading and what it represented, I was lacking a deeper understanding of market mechanics and the relationship between complete set ups and being able to act upon them. As a result I was looking for some magical transformation in my knowledge yet still ended up in a desert using sandpaper as a map. 

 

Over the past two weeks I've been revisiting old notes in order to see what progress I have made. At times I find myself utterly absorbed trying to take the next step I neglect to stop and look around and take a gander at the view. Lately I've found myself repeating a number of the same steps but I'd never know because the scenery is full of dunes and the wind keeps sweeping away my foot prints. Considering this I found it necessary to get my bearings and review.

 

The basis of GMMA analysis is tracking two types of market participants through moving averages, the traders and the investors. The traders are represented by the 3, 5, 8, 10, 12, and 15 EMA while the investors are represented by the longer term 30, 35, 40, 45, 50 and 60 EMA. Based upon the moves of these averages, the underlying sentiment of these two groups can be analyzed by their interaction. A core interpretation of this relationship from the traders perspective is whether or not the investors are supporting the move as indicated by the separation between these two groups of averages, and the separation of the longer term averages themselves as well as the support shown by the longer term averages when the shorter pull back into them.

GMMA Trend Velocity

One of the techniques of GMMA is the Trend Volatility Line, which I've dubbed Trend Velocity Line. Darryl Guppy explains the mechanics of this on his website.  Using these basics, I would move day by day across various charts and document the number of days it would take the 30 EMA to catch up in price to the 15EMA, and the separation and compression of the longer term averages. Additional notes I took were the pull back zones, pinpointing entry signals based upon price breaking the previous peak of the 3 EMA. As much as I tried to make this work at the time, I never quite could. In retrospect, I can now see that I had a full trading system to implement, but I also realize there were some fundamentals lacking in my play book to make something like this work for me. 

Currently one of the market structures I've been studying is momentum. With a clearer understanding of the mechanics and measurements of momentum I decided to take another gander using the NASDAQ since 07/27. I've illustrated key periods of interaction between the traders and investors and how I would now interpret this action. There are four zones where the traders made rally attempts and in each zone the interaction of the investors is telling. 

NASDAQ GMMA Analysis

 

Rally Attempt 1 shows a bounce by the traders, but this quickly fails as the fastest EMAs, the 3 and 5 period barely align to the upside before breaking down.

Rally Attempt 2 shows a crossing of the short term EMAs and price begins to enter into the range of the investors, which in the theory of GMMA analysis are important because it is their buying that ultimately supports the move. In this zone these longer term averages begin to show some support as evident by the flattening of the 30 and 35 EMAs, but not enough as this rally break fails. Further, the short term EMAs did not have a full cross over and realignment to the upside suggesting this attempt has a high probability of failure.

Rally Attempt 3 shows price breaking above the longer term averages and also shows them beginning to compress and flatten out indicating that the there may be some support showing up here from the investors. The velocity of these longer term moving averages is also beginning to slow in this area.

Rally Attempt 4 shows a confluence of price above the longer term averages, a complete alignment of the shorter term to the upside, and further flattening and compression of the longer term averages. As of 10/21/11, these averages are beginning to cross over themselves and realign to the upside.

GMMA Separation Count

Another way of looking at this is the rate of change of the longer term averages as represented by the difference between the 30 and 60 day EMAs. The peak separation was 106 and from there I've jotted at 5 day intervals the separation of these. Additionally, I plotted the number of days it takes the 30EMA to catch the 15 EMA price- between 08/12 this took 6 trading days. On that date I draw a trend line down to where the 15 EMA is and from that price draw a trend line across the chart. As can be seen, this lines has stood for 43 trading days without breaking.

Some other key factors that have become clearer in revisiting some of my old notes and applying it to my studies of underlying market breadth is that the signals given by the the GMMA have been in time with the other indicators I use. The Stock Bee Market Monitor that I use signaled bearishness on 07/27 and the following day the GMMA crossed to the downside. 

MM Bearish Signal

 

Comparing the GMMA to the $BPNYA, the $BPNYA gave a Bull Alert on 10/11, the GMMA crossed to the upside on 10/18, and the $BPNYA gave a Bull Confirmed signal on 10/10. Again, this signal is in line during this period at least. And the Market Monitor I use also indicates bullishness.

MM Bullish Signal

In placing my former thoughts through a sieve of current context I'm attempting to create continuity and bridge some gaps that I had at the time and some of which I continue to have.  In some ways what I thought at the time isn't much different then what I think now and this has both positive and negative connotations.  By taking time to review I can more clearly see where I am dog paddling, where I am swimming, and where I am drowning. More importantly I view this as a process of demystifying tools and indicators to avoid the trap of looking for something special when there are more significant areas where energy should be directed.  All three tools are closely correlated in their timing and each have limitations, but the greater limitation is not being able to do anything about the signal.

What's In Your Tool Box?

Education is hanging around until you've caught on.

Robert Frost

 

Over the past couple of months I've been analyzing sector rotation on a weekend basis. Prior to this I've tried to develop some tools to make better use of sectors and their rotation with limited success. Yet every day I keep plugging in sector information because I know it is important and significant and I also know why it is considered to be important and significant; however that doesn't mean I know how to make use of it for myself.

I kept scratching the surface and figured as long as I continued doing so eventually I'd get to the primer and perhaps deeper still. With time I did begin to peel back some layers and realized there were some severe short comings and limitations to how I was addressing this information. Information is abundant but without a plan to filter and manage -often useless. More information is not necessarily going to lead to better decisions, neither is better information without a process of applying it going to lead to improved decisions.

Once I started digging a little deeper I began to see the limitations of my applying this information and the delusion of knowledge evaporated. I had no realization that many of the Morningstar Industry Groups have 2 or 3 stock attributes so their significance of being in the top 20 becomes negligible, perhaps even lacking relevance at all. Some also have such limited volume that their significance is skewed as well. In acknowledging their limitations, their usefulness became better understood as well and a personalized process of application opened up, too.

Fin Viz uses the same data stream as TeleChart when it comes to its sectors, so it is an easy transition understanding the inherent limitations of this information. One benefit that Fin Viz has is its efficiency in moving back and forth between the sectors and the stocks that they comprise, as well as quick visual glances at the underlying chart formations. There is another tool that can be used with these sectors and that is running them through the stock screen. These two combine into a powerful tool of sector and stock scanning, as well as an idea generator. 

The first step is sorting the Industries by one month performance using Fin Viz

From this list I look at the top 20.

Top 20 from Fin Viz

Now that I have a list of the top 20 the next process is to use the Fin Viz Screener tool. My set up is fairly simple:

• small cap stocks
• up over the past half year
• over $3
• 100K average volume
• 10% or less below 52 wk high

 

Then I go through each of the Industries that are listed and check out which stocks meet the requirements. From this list I can now focus on those with charts that are consolidating in anticipation of the next swing up.

Having gone through this scan over the weekend, the main Industry that clearly stands out meeting the screen is the Apparel Industry. 

Apparel Industry

 

As this is the time to begin keeping robust watch lists and looking for the next leaders, this may be one group to keep in mind down the road. There are a number of ways to configure this to one's taste and rapidly generate trade ideas in keeping with one's methodology.