Hi, this is your Trader of Stocks. The stock market moves in waves. Learn when to adjust exposure and how to better time fresh money buys according to the current phase of the speculative and psychological cycle. Being in sync with the market is 90% of the game.
Which stock screen to run
This here is a stock market screening technique you can apply right away.
It helps to figure out where we are in the opportunistic market cycle (not to be confused with the classic stock market cycle!) and it allows you to be in sync with the market most of the time. Once you are experienced enough you won’t need four individual screens as you will be able to grasp the same informaion from your regular trading routine – IF you get your screening routine right!
However, as a novice trader it helps to actively screen for the specific events I am about to show you.
All you need is running the following four screens:
A) Moves off support on volume (i.e. Pocket pivots) in quality names.
Check if a Stock fullfills my basic quality requirements with our Stock Quality Checker here:
B) Pivot breakouts (base breakouts) in quality names (oftentimes into an uncertain market environment)
C) Price extension above the 50d MA in quality names
(Better watch out for clothesline hits, climax moves, major bearish outside reversal days or other proper red flag exits and exhaustion gaps in individual stocks. Also be aware of breakout attempts in laggards to lure in the late comers. It is hard to directly screen for that but you will get the clues when you are going over many charts each day)
D) Price-breaks below the 50d MA in quality names
You can set-up the respective screens in finviz or any other screener with real-time alert functionality.
How to interpret the events
You want to be aware when there is an accumulation of quality stocks flashing one of the four events above.
A) An accumulation of volume backed price moves off support is an indicator that a swing window of opportunity is opening. The pocket pivot is a strong price and volume clue and often the first sign of an upcoming market leg up.
B) An accumulation of classic pivot or base breakouts is then the confirmation and an indication that a larger market leg up is looming. This, more often than not, happens during earnings season. Besides the classic base breakouts you also see strong Momentum Gaps in quality stocks during earnings season.
OBVIOUS SIGNAL! This is when the market typically starts to shake the tree or even reverses for good. Monitor the major breakouts for breakout failures to get a clue. If those strong moves find support at logical support levels (not just any) everything is alright and the odds are in favour of a continuation of the rally.
C) When many stocks are way extended above their 50d MAs the day will come when you see clotheslines hits, classic climax moves and/or reversals in the leaders. Oftentimes the current thematic hot stocks show climax fever pitches first. This is a strong hint that the window of opportunity is about to close. An accumulation of red flags (MA violations, Big reversals and Outside reversals) in leaders would then be the confirmation. At this stage you’ll also see breakout attempts in the laggards to suck in the FOMO traders. Monitor those for failed breakouts.
D) When you see leaders break down through the 50d MA it is a hint that an upcoming broader consolidation phase is likely. You can also screen for 200d MA hits which often predict the end of your typical 8-12% intermediate correction. But it is better to simply wait until fresh entries show up again before jumping in.
OBVIOUS SIGNAL! This is also often the time when the market throws a lot of curve balls trying to shake out weak hands and sometimes even head faking an intermediate market correction.
And guys don’t be ignorant believing that the events above are just random and interchangeable with other signals. From my experience the accumulation of those events in leading speculative growth stocks is always meaningful and you must react to it in real time.
But you have to be patient. When you see them, they tend to change the enviroment in the short term so you have to trade accordingly and not reverse your opinion the very next day just because the market moved a little bit in the other direction.
And stop second guessing the signals. The market will try to shake you out on B and D and it will be much easier for the market if you are full of doubt.
Mass psychological explanation
The underlying mass psychology of this screening technique is as follow:
On the way up: A) Is a non-obvious signal which occurs before a market leg up so most traders will miss it. However by the time signal B) shows up all market participants are ready to jump in hence the increased odds of severe shake-outs.
On the way down: The same is true when stocks show crazy strength by running into the clothesline or showing climax moves and top reversals. Most traders are not willing or unable to sell into strength so they’ll likely miss signal C). Once their stocks pulled back on them and are approaching the 50d MA they will be ready to act hence signal D) is also prone to be accompanied by shake-outs just like B on the way up.
Over the years with a gain in experience and an improved chart eye you’ll be able to reach the same conclusion simply by running your regular screening routine and by monitoring your little universe of quality stocks.
However, it won’t work with a rigorous and hectic trading routine.
You would need to run an effortless and efficient screening routine so that your mind is actually capable to grasp all those clues on the fly.
To time the markets you need to be an observer and you need to have a little patience.
But it is not rocket science!