Perspectives Weekend Edition - Nov 12
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Commentary
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No strategy is 100% effective. Good analysis can reveal opportunities that
have high probabilities for success, but even good decisions will not
always have the expected result. However, when stocks that are showing many
signs of a directional move fail to make that move, there is a new
opportunity to reverse the position and make money on the opposite strategy.
To better understand why this is effective requires the understanding that
technical analysis is the use of market activity to anticipate new
information and measure market psychology. There are many speculators in
the market who each try to anticipate new developments before they are made
public. Often, they have access to better information and can predict the
future with success. However, the market sometimes surprises even those
closest to a company, creating disappointment for all those who took a
position in anticipation of the fundamental event. When the event does not
arrive or is countered by another, more significant event, the market can
quickly move in the opposite direction.
Consider this example. A company plans to launch a new and revolutionary
product. Those who follow the company closely are aware of the impending
launch, and are accumulating the stock in anticipation of the launch. Their
behavior in the market creates an optimistic trading pattern. It appears
the stock is ready to make a break to the upside and enter into an uptrend
motivated by the excitement of the new product. However, on the day before
the launch, the stock breaks lower from the optimistic pattern, giving an
indication that something is wrong.
In this particular example, news came out about a week after this breakdown
that a much larger and more recognized company had developed a similar
product that would compete for the same customer. The market showed a
belief that our example would not win against the more recognized company.
The lesson to be learned is simple. If the market goes against numerous
signals, it is likely due to some new information. The information is
significant enough to reverse the market’s psychology, and this reversal
has good potential to continue through time. Smart traders recognize that
the original assessment has changed, and reverse the position in time to
take advantage of the impending move.
Scores of Friday's Most Active Stocks
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NASDAQ
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Company Symbol Stockscore
Qualcomm QCOM 78
Intel INTC 63
Microsoft MSFT 40
Dell Computer DELL 55
Cisco Systems CSCO 78
US Over the Counter Bulletin Board
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Company Symbol Stockscore
Scientific Software SSFT 53
Ebaseone EBAS 72
FutureLink FLNK 65
DSL Net DSLN n/a
Breakaway Solutions BWAY n/a
*stocks require 200 days of trading to calculate a Stockscore.
Alberta Stock Exchange
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Company Symbol Stockscore
Cell Loc CLQ 98
Turbo Genset TUR.A 76
Big Picture Tech BPI 63
Net Shepherd WEB 66
Ecompark EKP n/a
Vancouver Stock Exchange
====================
Company Symbol Stockscore
Unique Broadband UBS 72
Edispatch EWD 72
Hilton Pete. HTP 56
Sideware Systems SYD 38
Medera Life Science MER 68
Toronto Stock Exchange
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Company Symbol Stockscore
Nortel Networks NT 69
Macmillan Bloedel MB 51
TD Bank TD 92
BCE Inc BCE 87
Newbridge Networks NNC 56
Stocks to Watch
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Cisco Systems (CSCO)
NASDAQ
Stockscore - 78
Rating: Bullish
Reference: http://www.cisco.com
- last week, I discussed the likelihood of a breakout through the $74
range, and how it would likely indicate an uptrend. The market appeared to
want to break to the upside, and it did this week when the company
announced better than expected results. Since Friday, the stock is up about
14% for the week. With the recent gains and the cold start on Friday, I
think we could see CSCO pull back a bit next week on some profit taking. We
may see a 50% retracement of the recent gains, to the $78 price range.
Scansoft (SSFT)
OTC BB
Stockscore - 53
Rating - Neutral
Reference - http://www.scansoft.com
- ScanSoft is a developer of digital imaging software for the small
office/home office markets. SSFT's products capture and convert paper
documents and photographs into digital documents and images. The company
closed deals with Microsoft on Wednesday and Hewlett Packard on Thursday,
which have sent the stock much higher over the past week. The stock has
probably gone too high on the euphoric trading activity, and looks like it
will experience a bit of gravity early next week. Already off of its highs,
but we could see it pull it back to the $7 or $8 level. Great stock for
trading because of the volume and liquidity.
Net Shepherd (WEB)
ASE
Stockscore - 66
Rating - Optimistic
Reference: http://www.netshepherd.com
- more than the story, I want to discuss the chart and this past week's
trading on Net Shepherd as it demonstrates the best situation to bottom
fish a stock. Stocks that are in steep downtrends often attract bargain
hunters, but it is difficult to know the best entry point. The simple
question is, when is the downtrend over and the uptrend beginning? To help
answer this, go look at a chart of Net Shepherd. The stock broke the
downtrend on October 5th, but then went into a consolidation pattern for
about a month. What is important to note is that the consolidation was
higher than the most recent low, forming what is called a rising bottom.
For bargain hunters, look for stocks that are starting to trade bigger
volume and are making breaks from these rising bottoms. WEB did that on
Wednesday, closing at $3.20. It ended the week at $3.89 and looks like it
can move toward teh $4.50 range in the near term.
Unique Broadband Systems (UBS)
VSE
Stockscore - 72
Rating - Bullish
Reference: http://www.uniquesys.com
- UBS is involved in the design, manufacture and marketing of wireless
broadband solutions for broadcast and telecommunications industries. The
stock has been very active lately, and making a good run. This brought news
today stating that there is no material change. They are probably promoting
their story on one of the deals they are working with some large US
companies. I expect we'll see the stock pull back to the $0.95 range in the
short term. Longer term, some deals may take this stock higher. Good for
traders, but volatile so be cautious of the risk.
TD Bank (TD)
TSE
Stockscore - 92
Rating - Bullish
Reference: http://www.tdbank.ca
- I discussed TD Bank last week as one to consider for the conservative
part of your portfolio as it looked like it wanted to go higher. It has
done well this week and looks like it can continue to go toward the $40
target price.
The Scores - What They Mean
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***The scores that are attached to the stocks are based on a proprietary
model developed by Stockscores.com. This model factors in numerous
technical analysis indicators and utilizes the past 200 days of trading
data. Stocks that have not traded for 200 trading days will not have a
score calculated.
Scores greater than 70
Bullish
This stock is worth considering as a buying opportunity. Our model
indicates that the stock has good potential to go higher in the short term,
and is worth taking time to consider. Complete your due diligence on this
stock so that you can make your own judgement on the quality of the company
before making a decision, and remember that our score is valid for the
price that the stock is at when we applied the score. Of course, a score of
98 has more potential than a score of 72, but all stocks in this range
deserve your consideration. In addition, if you are short this stock, you
should consider covering the short position.
Scores between 60 and 70
Optimistic
Market activity is beginning to indicate improved optimism for this stock
and it should be put on a watch list as a stock to consider. If you already
like this company's fundamentals, you should now look for the signals that
the time is right to own the stock. If you own the stock, you are likely in
good shape but may want to consider taking profits if profits are high. If
you are short the stock, you should approach your position with some
caution and watch for the signal that it is time to cover.
Scores between 40 and 60
Neutral
Market activity is doing little to indicate the future direction of this
stock. The stock is likely in a trading range, or, if it has been in a
strong trend over the recent past, it may be starting to reverse that
trend. If you own this stock and are in a profitable position, you should
consider whether the stock is reversing and it may be time to take your
money off the table.
Scores between 30 and 40
Cautionary
Market activity is beginning to indicate caution is warranted for this
stock and it should be put on a watch list as a stock to sell or short. If
you believe that the company's fundamentals do not warrant the valuation
the stock has received, you should now look for the signals that the time
is right to short the stock. If you are already short the stock, you are
likely in good shape but may want to consider taking profits if profits are
high. If you are long the stock, you should approach your position with
some caution and watch for the signal that it is time to sell.
Scores less than 30
Bearish
Market activity is very negative on this stock and it may be very risky to
hold this stock. Shorting opportunities should be explored after doing the
appropriate due diligence. If the stock has suffered a major sell off
already, traders may want to watch for signs of a reversal bounce as a long
trading opportunity, but be sure to watch for the technical reversal which
will likely be accompanied by an increase in the stock score.
As a final thought on this new scoring system, it is important to consider
where the score has come from. A stock that moves from 60 to 75 is likely a
better opportunity than one that moves from 90 to 75. Also, consider where
the stock is relative to the score. Again, a stock that has made
considerable gains of late may have a good score, but entering the stock
given the gains it has made will be riskier. Risk is factored into the
model, but use some of this common sense.
Finally, remember that this model is generated by a computer and should not
be used to make investment decisions. It is a tool which can help you find
opportunities from the thousands of stocks that are out there. However, you
have to do the work to take the list of stocks with the scores you want
down to the stocks you want to put your money on.
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