The working person’s trading method detailed. Part 5 The characteristics of a stock that makes my watch list.

The Elusive SuperStock

In this post I will detail the types of stocks I am looking for. For the Episodic Pivots or SuperStocks, you can get tremendous amounts of detail from reading Jesse Stine’s book and by reading Stockbee. In a nutshell, you want to see a stock that has tremendous amounts of neglect that has a sudden, game changing, reversal of their story. Typically, these game changing stories happen during earnings season. Jesse Stine made a prodigious sum of money via this strategy, as has Pradeep from Stockbee. Their approach to this method is not entirely the same, but combining the two gives you a solid strategy that, with practice, takes very little time.

The potential exists to find a life altering stock with this strategy. In my personal experience, these types of setups are ultra rare in the last several years. I believe their to be a multitude of reasons why this is the case. One we have been very near all time highs the last several years. I do not agree we are in the ninth year of a bull market as many “experts” have proclaimed(I think late 2015 through 2016 we had a mini bear market though there was not the ultra deep correction that some bear markets have.). However, I do think we currently are not seeing valuations at a level that are super healthy for SuperStocks.

Also, I think that information flows incredibly fast which does not allow much room for information arbitrage. If a stock releases blockbuster earnings in today’s market it might rise 100% within minutes of the release, even in after hours. Quantitative traders are able to react instantly to new information. I also think insider trading happens more now than at any time in history. What at one time could have become a SuperStock at some point, now begins to make it’s move months before the blockbuster earnings hits the market. This is why I think the technical side of this method has much more bearing than the fundamental side at this juncture. If you see a stock exude the technical characteristics of a SuperStock, but has terrible fundamentals it may still warrant being watch listed.

Perhaps a better “SuperStock” market will one day present itself. When that happens I will be ready with many years of experience looking for these things. Hopefully, many readers of this blog will be ready as well. I do occasionally find setups that do not meet all of the criteria, but come very close. As said before, I give much more weight to the technical side of the setup these days.

PLNR. Not A SuperStock, but had a lot of the characteristics.

As for true SuperStocks I have not found very many. Perhaps the closest I found was Planar PLNR back in 2014. I can’t find the earning release for it as they were bought out, but it had a first earning release that was a moderate surprise. I ended up buying it on the pullback before the next earnings release which was a major surprise. It ran from 3 to 6 literally in the matter of 30 seconds. From there it drifted upwards towards 8. I sold most of my position at a 100% profit. The problem is that many of these run too fast in today’s environment and the run is instantly over with. I have had better luck buying stocks that are trending nicely, but not getting ahead of themselves. These tend to be much bigger gainers for me in the long run than stocks such as PLNR.

Despite the market for SS’s changing, there is still a lot of money to be made with Jesse Stine’s strategy. It’s just that the true full blowns SS’s are not there very often, but the stocks that have a lot of the characteristics, but not all, can still be big performers.

Here is my spreadsheet I use to track EPs/SSs. You can get a real-time update on what I am seeing. Also check out my weekly watch lists.

The New Trend Setup

For advanced information on the SuperStock setup please see the Stine and Stockbee material. I will transition to my next setup which is more along the lines of a Dave Landry stock. I basically try to get into new trends as soon as possible. I have multiple scans I run to find these. During week days I only run the Episodic Pivots scan due to time constraints. On weekends I run several scans. I will get into detail on each individual scan, how to set it up, run it, and what I look for in future blog posts.

What I am looking for in these scans is a stock that exhibits the characteristics of a stock that has entered a new trend. I like to see a strong theme coupled with the trend, and as a bonus seeing decent fundamentals though these do not usually have the greatest fundamentals. I predominately trade on the long side, so to clarify I am typically looking for stocks in a new uptrend. How does one quantify a trend? Well as Dave Landry explains, you want to see higher highs and higher lows. Can you draw a line, that is going up, through multiple bars. Preferably, 15–20 bars. Has the stock cleared any old downtrend lines? Is there a massive amount of overhead supply to deal with?

Here is a recent example that I traded for a very nice gain. Goldfield GV:

This stock I entered at 4.94 which was a pullback to the breakout level. I do not typically do this unless I really like a setup. I sold half my position at 5.9 before ultimately being stopped out at 5.3. This was definitely not my biggest winner ever, but it is a great example of the type of chart I want to see. It had a nice thrust out of the low base in November. It pulled into a nice flat base in December which is where I was looking for an entry. It came extremely close to my order but did not quite trigger. I ended up setting a higher order when it broke out at the breakout level as I really liked the setup. It triggered and I transitioned to the money management phase where I monitor my stop, initial profit target(around 20% usually), and trail my stop as it trends higher.

Another recent example, but one I did not trade as I had my capital was tied up is KEM:

This one if I would have traded it I would have looked to enter in the first stage base on the pullback to the 6.17 level. It is a slower mover, but I often like these as they tend to trend for very long time periods. Despite its somewhat slow ascent this along with GV have been some of the top performers in the market in 2017.

I will have to dig back into my old trades to find some more examples of stocks that I actually traded or at least would have traded if I had the capital available. But the basic premise is incredibly simple. Look for a nice new up move couples with a good theme. Buy the first pullback.

IPOs

For IPOs I look for the ones that have a lot of hype that quickly dies down after the first big pullback. I trade maybe one of these a year if that. Some examples are ROKU and GPRO. I try to buy at a support level if one is available(usually not). Otherwise, I will buy the upwards break of the small downtrend line of the pullback.

Float, Price, Liquidity Bro

Another important detail is the float of the stock. Float is simply the number of shares available for trading by the public. A lower float means it takes less buying power to move a stock. I love small floats. Anything less than 100 million is good, less than 25 million float is great. That does not mean I will not trade higher float stocks, but I definitely gravitate towards lower floats.

While the price of the stock doesn’t inherently matter, I do like the percentages from “lower” priced stocks. If I have to choose between a stock priced at 5 versus one at 50 where everything else is equal I choose 5. The percentages are much nicer at those levels. You will find the majority of stocks I trade are priced less than 30. Some texts will state they do not trade anything below a certain price, be it 5, 10, 15. I am the opposite.

I do pay attention to the liquidity, or average daily volume of a stock. I prefer to see at 100,000 shares traded daily on average. This ensures that the liquidity is high enough to be able to get in and out of a stock when you want to, within reason.

Fundamentals are still the king

A small floater with great fundies is still preferred, though not always readily available.

The Rest Comes Later…

The details will be ironed out over the course of this series, but at this point you should have a decent understanding of the basics. Much of the rest could be picked up on by a motivated person. I have given you my scans, when I run them, what I look for in them. I have given a basic idea of how I set stops and targets, and there is a massive amount of information available on this topic.

The rest of the series will be continuing this series to get into those details.

If you have read this far, undoubtedly you have a lot of questions. I do plan to at some point address many of them in future blog posts, but please feel free to ask questions in the comments, on Twitter, StockTwits, etc.

Working person’s trading method series:

Part 1: Why you should trade.

Part 2: Resources

Part 3: My Trading History and Introduction.

Part 4: An overview of my process.

Part 5: The characteristics of a stock that makes my watch list.

Part 6: Money Management: Finding Buy Points, Setting Stops and Targets, Position Sizing

Part 7: The Weekday Routine and Scans

Part 8: The Weekend Routine and Scans

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Originally published at Speculate Freedom.