This Is How I Discover Gems

  • February 12, 2003
  • Rob Hanna


This is starting to feel like late June
/ early July of 2002 to me. This time, the worry is not “When is the next
corporate scandal going to drop?”  It is, “When is the next bomb going to
drop?” Wall Street is no longer afraid of accountants. Now they have war and
terrorists on their minds, and terrorists are even scarier than accountants.

Like late June / early July, the markets are consistently moving lower. Leading
stocks and sectors are breaking down one after the other. Breakouts are
failing. The VIX
(
$VIX.X |
Quote |
Chart |
News |
PowerRating) is moving
higher, but is still not at extreme levels. We have not had more than two
consecutive up days in the S&P 500
(
$SPX.X |
Quote |
Chart |
News |
PowerRating)
for a month now.  Selling short seems just as treacherous as going long. 

A pullback is needed to more safely initiate short positions. That pullback
hasn’t come yet, and the longer we go without it, the sharper it will more
likely be. How this will play out, I don’t know, but since cash seems to be
becoming a favorite investment, I thought I would share with you one idea that I
use to uncover trading opportunities. That way, when the time is right for you
to get more aggressive, hopefully your list of potential trade candidates will
be a little longer.

Like most traders, each
night after the market closes, I sit down and go through my charts. 

  • First I look at
    the indices to get a feel of how the general market is acting.  This also
    helps me determine what areas and which side of the market I may want to focus
    on. 

  • I then look at the
    stocks I am holding and take notes on any significant action. Significant
    action would include patterns that look to be emerging, patterns that are
    breaking down, or continuations of patterns that I had identified previously. 

  • I also re-evaluate
    the stop placement of all my stops, and check to see if the day’s action would
    allow me to adjust any stops so that I may lock in additional profits.

  • After this, I go
    through my watch lists to see how stocks I am considering purchasing or
    shorting are setting up. I’ll also take notes here on any stocks that look
    poised to trigger an entry for me.

The last group of
charts I go through has proved to be some of the most valuable to me over the
years…

I will pick one or
two industry groups and go through every stock in the group. This takes very
little extra time, and has helped me to uncover innumerable gems. Many times, by
doing this, I have found stocks that may have escaped my normal scans. Picking
some appropriate industry groups to look at is a rather simple matter, and there
are many places on Tradingmarkets.com to help with this.

The most obvious
place to look would be in the
Markets &
Sectors section of the Indicators page.  I especially like the New High RS
and New Low RS lists, although any of those lists could give you some suitable
industry groups to explore.

One of my favorite
places to find ideas is

Dave Landry’s nightly swing trading column. I am not talking about just day
and swing trading ideas.  I am talking about using Dave’s column to find
possible intermediate term candidates.  In his column, Dave will frequently
mention sectors of the market with notable strength or weakness.
Embraer-Empresa Brasil
ADS 
(
ERJ |
Quote |
Chart |
News |
PowerRating), the stock I
discussed in

Monday’s column, could easily have been spotted this way.

In Dave’s

Jan. 30 article he listed a number of sectors that looked vulnerable to him.
Defense was one of these. Anyone who went through the stocks in this sector that
night or the next day would have come across ERJ, and been able to make a
determination as to whether it fit their criteria. Since Dave is focusing on
shorter time frames, many times it seems he will spot strength or weakness in a
sector before the average intermediate-term investor. Even if you only focus on
intermediate-term trades, you’d be well served to check out Dave’s column each
night. You never know when he might point out a sector that is filled with great
setups in your time frame.

Regardless of how
you choose what industry groups to look at, make it a part of your routine to
check out a couple of groups each night. You’ll be surprised at how many more
opportunities you may uncover for your trading.

Good Trading,

Rob Hanna


robhanna@rcn.com

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