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New Leaders?
by derek 17 May View Comments

I believe last week contained critical information for traders and investors. Following the Flash Crash the prior Thursday, we had more selling on Friday but stabilized late that morning to make what I consider a usable low event on May 7 near 1100 on SPX, 10250 on DJIA, and 2230 on NASDAQ. We came into Monday morning with a massive bailout from the ECB, leading to a 4% gap higher.

For me, there was no edge available in that 3 day chaos. In my earlier days, I was more of a Boy Plunger who would thrive in such an environment. Over time, I grew to embody the statement, “There are old traders and bold traders, but no old, bold traders”. Now I act after the wildness has cleared, with evidence of innovators ahead of me. They take more risk, and are entitled to more reward…my psychology works better in the early adopter phase.

This week brings some potential. I run scans each week, but since stocks each have their own calendar I don’t usually feel they offer compelling information. The recent market dynamics, however, tell me that I can use this as one of those rare anchor points where every stock gets a fresh start. I’ve whittled my list of nearly 1000 liquid stocks into a watchable group demonstrating the following signs of strength:

1) Closed well above the week’s volume-weighted average price(VWAP)

2) Closed well above Monday’s opening price

3) Closed in upper end of week’s trading range

4) Closed at least 1 full “True Range” above week’s low

cont

http://derekhernquist.com/?p=288


This is a starting point for research, NOT a buy list. As discussed in this post, I think the Flash Crash was an event resetting the market for a new list of eventual leaders and laggards. Trading data prior to that data is mostly useless, so rather than watch prior leaders and laggards I prefer to focus on who has stepped up since.

The original list contained a long list of gold and silver miners…I took them out because I don’t consider that a move of independence. When precious metals go up, they run together so all I need to know is that gold and silver rocked last week. Those stocks carry different correlation characteristics than the list above, so they just clutter my list.

I’m looking for subtle, surprising strength in stocks that may not be on the momentum radar just yet. There is much work to do beyond these initial screens, like longer timeframe analysis and identification of critical support and resistance. Most importantly, I need to see strength emerge against a mixed market this week to actually pull the trigger. A nasty downturn would likely overwhelm any strength that has occurred on an individual stock level.

I prepared every day last week, but never felt compelled to act until beginning a bullish IBM position on Friday. If we get a nasty downturn this week, this list will probably be overwhelmed and dragged into the mud. However, a move allowing quiet accumulation to occur in the names above would bring me to action on a moment’s notice. Most of the list will fall into the market’s direction, but any names destined for the New High list are sure to pass these kinds of tests first.