I use fundamentals, technical analysis, and seasonal patterns. But in a nutshell, what is it I look for?
It all comes down to one simple philosophy. The only way a stock goes up is if buying overwhelms selling. The primary source of buying comes from institutions. So I focus on identifying possible institutional buying in a stock. The reverse applies if I'm considering short trade candidates.
How do I identify buying, and especially buying likely from institutions? Volume patterns, breakouts on high volume, up-moves after positive earnings announcements, volume on up-close days overwhelming volume on down-close days, and accumulation during a time of year that historically has led to strong gains in the stock (institutions are aware of seasonal patterns – astute traders return each year to what has worked for them in the past).
You may not like this newsletter. Several readers asked me to stop using black background charts, apparently because they like to print out the newsletters and black-background charts eat up a lot of ink. But I really want my argument to stand out, and nothing makes the case like a dark chart. I'll stick to two dark charts.
First, an example of a stock I will not be recommending to readers right now. Since mid-2012, several insurance stocks have been steadily rising. Aflac (AFL) is one of them. But for almost three months, AFL has been trading sideways. More importantly, there have been well-above average volume spikes on several down-close days. If you were standing across the room, you could see these volume spikes:
So far, AFL has not broken down. But those volume spikes suggest (but don't guarantee) that institutions are selling off their AFL positions. Volume like that does not come from individual traders responding to a comment Jim Cramer made on last night's show.
Why might institutions be selling Aflac? With Aflac's Q4 earnings due (around February 3rd), have institutions, historically, accumulated or sold off AFL stock? A look at the seasonal track record shows little gains over the next several weeks. While AFL may not regularly sell off this time of year, it certainly hasn't had strong gains:
The Up/Down Volume Ratio indicator, frequently referred to by Investor's Business Daily, is a numeric value that shows whether there is buying or selling in a stock. Up/Down Volume Ratio is the ratio of total volume on up-closing days, divided by the total volume on down-closing days, over 50 trading sessions. A value > 1.0 usually indicates more buying than selling interest, and a value < 1.0 indicates greater selling. AFL's current U/D ratio is 0.7, indicating distribution is going on in the stock. That confirms what was quite obvious in the above chart.
Why is AFL showing possible institutional dumping? Is the duck headed down? Well, Aflac's earnings and revenue growth took a hit last quarter. Quite possibly institutions are expecting further problems.
Institutions may be selling off before problems become widely known. My assumption may be wrong, but do you want to bet your money on it?
Now let's look at an example of a stock that institutions may have taken a strong interest in.
Back in the February 20th, 2013 newsletter, I first focused on Wolverine, saying “You know Wolverine, they make boots, among other things. This is Wolverine’s ‘1000 Mile’ boot. That claim uses miles because they are made right here in the USA. The ladies will know you are a no-nonsense man who goes for quality and dependability when you show up in a pair of these. And it can work both ways. You ladies can make a statement as well – they have smaller sizes.“
“Wolverine caught my attention today, due to the stock’s response to Wolverine’s earnings announcement yesterday morning – a 5% leap on volume 260% above the average level.“
“Wolverine has completed the acquisition of four brands. Blake W. Krueger, the Chairman and CEO, said ‘With the addition of Sperry Top-Sider, Saucony, Stride Rite, and Keds, our portfolio of global brands has never been stronger. We are diversified across most consumer groups, distribution channels and geographic regions, and have multiple brands in the portfolio that are delivering accelerated growth. We are focused on delivering excellent growth, strong profitability and impressive returns to our shareholders, and we look forward to building on our brands' momentum in 2013 and beyond.'”
Referring to the seasonal pattern, I said ” WWW has a strong seasonal pattern. It has increased an average 9.2% over the next 9 weeks, with gains in a whopping 90% of the years. That’s 26 out of the last 29 years. “
In the previous stock chart, notice the big green volume spikes. Over the previous 4 months, there were a few very high volume up-close days. Perhaps one or more institutions were starting to accumulate WWW.
WWW consolidated for 4 weeks, then broke out to higher highs on increasing volume. This was possibly a sign one or more institutions were adding to their position:
In the July 12th, 2013 newsletter, I pointed out that WWW had again spiked upwards on strong volume, saying “WWW is now up 30% from my February 20th article. The recent breakout strongly suggests this stock has plenty of upside potential left.“
I noticed, and commented on in the September 3rd, 2013 newsletter, that WWW had continued its upward trek with regular volume spikes:
I also pointed out that “Wolverine's U/D ratio is currently at 1.7, but the trend indicates accumulation has been increasing over the past year.“
Once again, in the October 11th newsletter, as the partial government shutdown was headed towards resolution, I shared my observation that “WWW's volume pattern is showing bouts of accumulation. It appears ready to break above the highs set 3 months ago. Again, external events should be your primary concern right now. But as long as the political situation seems to be headed for resolution, I would buy if WWW opens up, especially gaps-up, above previous highs. Existing positions can be added to and covered calls can be considered as well. Options are not actively traded on WWW, so any other trade strategies aren't viable. Earnings were just announced, so they won't be a factor for a few months.“
Notice that the volume spikes were continuing to show up:
WWW did break upwards in mid-November.
Here it is, still showing periodic volume spikes on up-close days (WWW split 2-for-1 on 11/4/13).
Can you see the volume spikes on this chart from across the room? THAT is how you identify likely institutional accumulation of a stock.
Oh, and Wolverine's recent earnings and revenue growth look a lot better than Aflac's:
WWW's Up/Down Volume Ratio is a very strong 2.2, well above the 1.3 level I find is usually associated with stocks under accumulation.
Finally, WWW's current seasonal chart shows a strong track record of WWW gains over the next 15 weeks. Since 1990, WWW has had only 3 losses, of 3.9%, 3.1%, and 1.6%. But look at some of those gains:
WWW is up 50.7% since my first identification of likely institutional accumulation on February 20th. WWW may be consolidating in preparation for another breakout to the upside. I will watch this stock closely and consider a new stock position, or an addition to an existing stock position, on any move backed by strong volume above the recent high of 34.10.
Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, including the answer to the above question, type in www.markettamer.com/seasonal-forecaster
Copyright (C) 2014 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.
Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.
As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.
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