Selection of Trades By Identifying Buying and Selling Pressure

September 30, 2000
Kevin Haggerty

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

Strong relative strength

Overweighted by the Generals

Volatility (good average daily
range)

Higher priced stocks (minimum 50,
better >75)

Liquidity (average daily volume
>700,000)

Program Trader (you get added
acceleration if your stock is part of program trading for the S&P 500
and the NDX 100)

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

Closing price >= 75 and <400

50-day average volume >=
750,000 shares (remember the StockScanner expresses volume in hundreds of shares, so enter this figure as “7500”)

EPR >= 80

RS (three month)>= 80

Closing price >20 MA, >50 MA,
>200 MA

DMI = UP

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.

Screen II: Technical

Closing price >= 75 and < 400

50-day average volume >=
750,000

R.S. (three month) >= 90

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

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

Scroll down to 13-D filings (left
side)

Select Full Database and ALL forms

Highlight Mutual Fund choice

Submit choice

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:

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)?

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.

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!

Selection of Trades By Identifying Buying and Selling Pressure

BUY THE FEAR, SELL THE GREED

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