Monday's Prospects

On Friday, Jan. 24:

Of 3,877 stocks and exchange-traded funds in this week's analytical universe, 340 mid- and large-cap symbols that are traded on the major American stock exchanges broke beyond their 20-day price channels, eight to the upside and 332 to the downside.

Ninety-three major-exchange small-cap symbols broke out, three to the upside and 90 to the downside.

Twenty-seven over-the-counter symbols broke out, one to the upside and 26 to the downside.

Four mid- and large-cap symbols traded on the major exchanges survived my initial screening, all having broken out to the downside. They are FNSR, UTIW, VIP and KEP.

Seven small-cap major-exchange symbols survived initial screening, one having broken out to the upside and six to the downside. The upside breakout is NOG. The downside breakouts are TEAR, VVTV, XONE, IL, CQB and CMTL.

No symbols traded over the counter survived my initial screening.

I shall do further analysis on Monday, Jan. 27.

I don't normally screen for options liquidity until the second round of analysis, but I'll note that of the downside breakouts, only FNSR and XONE have sufficient open interest to support a bear position. The others will be tossed out at the start of the second round.

That leaves a fairly poor selection for Monday, but Friday was an unusual day, a sell-off of significant proportions. The market as a whole has been in an uptrend for a long time, so a lot of stocks failed the odds and net returns screening test simply because they don't have a downtrending history to speak of.

If I ignore the odds and net returns tests, I find these symbols with liquid options, volume of 5 million shares or more and breakouts to the downside otherwise passed the screening process: SPY, KEY, DRYS, IGT, EFA, MS, XLE, JNJ, XLB, ABT, XLY, XHB, NBG and ITB.

I may well factor them into my work analysis on Monday.

The next round of earnings began on Jan. 9, with the announcement by AA, triggering the exclusion rule that forbids me from opening new positions in stocks within 30 days of an earnings announcement. This means that increasing numbers of symbols will be removed from my prospective trades list during initial screening.

Methodology

The symbols are sorted into three groups and all have analyst coverage through the stock-ranking company Zacks. The groups are:

• mid- and large-cap stocks as well as selected exchange-traded funds listed on major exchanges,
• small-cap stocks on major exchanges,
• mid- and large-cap over-the-counter stocks.

The small-cap group is further selected to ensure a minimum market capitalization of $1 million and a Zacks ranking of neutral or more bullish. (Small-cap stocks rarely have sufficient liquidity to allow a bear trade.)

I then screen the symbols for historical odds of a profitable signal in the direction of the breakout since June 24, 2013. That date is when the present uptrend on the S&P 500 chart began. In Elliott wave terms, it is wave 5 to the upside.

If the odds of success are 50% or greater, I next screen for the absence of an earnings announcement within the next 30 days.

For bear signals, I also screen to ensure the ability to do a trade, either because of the presence of options, whatever their open interest, or sufficient volume to allow for the short sale of shares. Symbols that are too illiquid for a bear trade are removed from consideration.

I sort by the results in descending order by the average yield on signals in the direction of the breakout in preparation for the second round of analysis after the opening bell.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading. 

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.