Picking the Right Stocks Using Charts

by Michael Kahn

Picking The Right Stocks Using Charts Splash image

Investors are always searching for ways to “beat the market,” and while naysayers abound, studies have shown that individuals can indeed produce superior returns in their portfolios. The best part is that it does not take advanced degrees and high-powered computers to do it.

If half the battle in the stock market is recognizing whether a bull or bear market is in place, then the other half is choosing the right sectors and the right stocks. This is the basis for relative strength or relative performance investing. Find the sectors and stocks that are outperforming the market, ride them until they stop outperforming and then find the next leading area. Indeed, relative performance is represented by not one but two letters in William O’Neil’s CAN SLIM stock selection methodology. “L” stands for leader or laggard versus other stocks, and “M” stands

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Michael Kahn CMT, writes the twice-weekly Getting Technical column for Barron’s Online (www.barrons.com) and the daily Quick Takes Pro newsletter (www.quicktakespro.com). Kahn will be speaking at the AAII Investor Conference this fall; go to www.aaii.com/conference for more details.


Discussion

Bruce from Colorado posted over 2 years ago:

I like your article. Please tell us where we can find the data and software to create the ratio charts for the top down analysis.
Thanks, Bruce


Charles Rotblut from Illinois posted over 2 years ago:

Bruce,

Joe Lan wrote a column in this issue listing several charting websites and software programs.

Here is a link to it:
http://www.aaii.com/journal/article/analyzing-stock-and-sector-price-momentum

-Charles


Walter from Texas posted over 2 years ago:

Bruce, I like the sector SPDR charts. Go to
http://www.sectorspdr.com/sectortracker/?do=htmlsectortracker. I think you will find this very usefull. Walt


David from Pennsylvania posted over 2 years ago:

Would using Stock Investor Pro be the software to use to produce these charts? or would we be able to produce them with any good, free stock screen software?


James from Ohio posted over 2 years ago:

This is a good introductory article on Relative Strength.

In the past year, correlations have been fairly high (as reported elsewhere). I suggest that when that is the case, an investor might as well put his/her money in the investment that is rising the fastest.

However, one needs to always bear in mind that, just because its Relative Strength is rising, it doesn't mean the price of an investment is rising. It could be that the investment one is comparing to is falling much faster. After finding an investment with rising Relative Strength, one should always look at the price of the investment to make sure it is rising, too. - - - When the market has been losing 30%, an investor should never find it satisfying that he/she outperformed the market by losing only 20%.

Which brings me to the one statement in the article that I have a major quibble with, "Bear markets should not deter investment." There may be long term investors who want to invest their money and never pay attention to it for 10, 20, 30 years. - - - The rest of us are doing what we can to avoid bear markets / big losses. If you were one of those rare people who had invested in the 5% of the stocks that rose in price during the bear market that started in late 2007 and carried through early 2009, then you probably don't need to be reading articles on investing.


Russell from Missouri posted over 2 years ago:

need more information on how to divide one stock by another.


Gil from Louisiana posted over 2 years ago:

I may sound like a walking Fidelity.com commercial, but I swear I have no stake in them.
I just used them for twenty years or so, and have no intention of changing.

Any person who opens an account with Fidelity, even a very small one, has immediate access to a enormous number of features.

My favorite feature is that I can enter or click on the symbol for any stock or fund and get a quote. If its a stock I can just click on the little graph and up pops a snapshot graph that is more sophisticated. At the bottom I can choose a period of time anywhere from one day or two days, a week, one month, six months, a year, two years, three... or on the whole life of the stock. I can click at the top on any index box, but I just click on NASDAQ because the other two come so close to walking in its tracks, over any extended period, that it tells me, in a sense, what "the market" is doing. The graph of the stock I'm evaluating is boldly displayed and, at this point, I can see how its price has performed in relation to the NASDAQ. Then, I like to have in mind a couple of stocks I know have been beating the market and, in recent months the two I like to compare any and every other stock to are DLTR and AAPL. It's hard to find any other stock in the past month, six months, year, two years... that has beat them. But I'm interested in looking farther into any stock that over any of those speans of time has come anywhere close to measuring up to them. These two, also, have been relatively less volatile than most other stocks, and have tended to ride over slumps better... so there's another comparison, as instantly visible as can be.

If there are other brokerages that offer anything better, go for them. I'm just sharing how simple and easy it is with this particular brokerage service. There are other brokers that charge less in buy and sell fees but, so far as I know, they don't offer all the free features I use on a daily basis.

With practice, you can go down a list of stock symbols, clicking on the symbol, then clicking to go to snapshot mode, and know a large proportion of all you need to know to cull out a stock, or know whether it is worth doing some really nit picky analysis of.

If others have a brokerage, or some software, or some other kind of source for getting so very much valuable information in a minute or two, more power to you.

I just wanted to let you know about the one I really, really appreciate and use many times each market day.


Richard l. Huitema from Illinois posted about 1 year ago:

The article doesn't mention that a Relative Strength measurement implies a time interval, since it is a ratio of performances, each of which is the difference between the current price and a former price.

FreeStockCharts, one of the sites Charles mentioned Joe Lan wrote about, gives RS charts with user-specified intervals; on a chart, click Add Indicator to select Relative Strength and Daily to change the interval. The URL is:

http://www.freestockcharts.com/

Or, get 52-week relative strength charts from S&P for all nine sectors (plus a few more) at:

http://www.sectorspdr.com/shared/pdf/sectorResearch/Sector_Charts.pdf

Dick


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