When is a short term decline a signal not to enter long?

Lately it seems that short term stock traders would do well to have a psychology degree. Last Friday's scan revealed CTIC as a potential buy. Why, oh why was this a buy? Sure it was in the top percent of recent performers, but it was clearly on the way down. Yet, stocks on the way down eventually either disappear or start going up.

CTIC should not have been a buy since it had fallen significantly from it's recent high. For all of the top half year RSI stocks, I'm disregarding any stocks that are 5 percent or more below the month's high closing price. The results are friendlier and less prone to be in a massive sell off. When a stock's price falls drastically, short term long buyers are in a frenzy to sell the stock, and the short buyers are happy, so momentum is likely to continue down. The following stocks appear on the down but not out scan:
DFZ, BARRY R G CORP (Google Yahoo Earnings Chart) 
HTE, HARVEST ENERGY TR (Google Yahoo Earnings Chart) 


The following stocks all made a 4% or move up today and all of these stocks have a strong half year RSI:
AP, AMPCO PITTS CP (Google Yahoo Earnings Chart) 
ARGN, AMERIGON INC (Google Yahoo Earnings Chart) 
BTJ, BOLT TECHNOLOGY (Google Yahoo Earnings Chart) 
CRYO, CRYOCOR (Google Yahoo Earnings Chart) 
DRYS, DRYSHIPS INC. (Google Yahoo Earnings Chart) 
GMO, IDAHO GEN MINES I (Google Yahoo Earnings Chart) 
LOCM, LOCAL.COM CORP (Google Yahoo Earnings Chart) 
MVIS, MICROVISION INC (Google Yahoo Earnings Chart) 
NVEC, NVE CORP (Google Yahoo Earnings Chart) 
USAT.OB, USA TECHNOLOGIES (Google Yahoo Earnings Chart) 

The following stocks had 3 days of continuous strength:
ARSD.OB, ARABIAN AMER DEV (Google Yahoo Earnings Chart) 
ASI, AMER SAFTY INS HL (Google Yahoo Earnings Chart) 
BBGI, BEASLEY BRDCST GR (Google Yahoo Earnings Chart) 
BBOX, BLACK BOX CP (Google Yahoo Earnings Chart) 
BCON, BEACON POWER CORP (Google Yahoo Earnings Chart) 
BYM, BLACKROCK INS MUN (Google Yahoo Earnings Chart) 
CCOI, COGENT COMM GROUP (Google Yahoo Earnings Chart) 
CKNN, CASH SYSTEMS INC (Google Yahoo Earnings Chart) 
CLCT, COLLECTORS UNIV (Google Yahoo Earnings Chart) 
COCO, CORINTHIAN COLLEG (Google Yahoo Earnings Chart) 
CPLA, CAPELLA EDUCATION (Google Yahoo Earnings Chart) 
CVTX, CV THERAPEUTICS I (Google Yahoo Earnings Chart) 
EGOV, NIC INC (Google Yahoo Earnings Chart) 
EPD, ENTERPRISE PT UTS (Google Yahoo Earnings Chart) 
EPIC, EPICOR SOFTWARE (Google Yahoo Earnings Chart) 
EXTR, EXTREME NETWORKS (Google Yahoo Earnings Chart) 
FNBP, FNB CORP (Google Yahoo Earnings Chart) 
GEX, GLOBIX CP POST BK (Google Yahoo Earnings Chart) 
GMO, IDAHO GEN MINES I (Google Yahoo Earnings Chart) 
GNSS, GENESIS MICROCHIP (Google Yahoo Earnings Chart) 
HWK, HAWK CP CL A (Google Yahoo Earnings Chart) 
IFN, INDIA FUND (THE) (Google Yahoo Earnings Chart) 
IKN, IKON OFFICE SOLUT (Google Yahoo Earnings Chart) 
INNO, INNOVO GROUP INC (Google Yahoo Earnings Chart) 
KEA, KEANE INC (Google Yahoo Earnings Chart) 
KOMG, KOMAG INC (Google Yahoo Earnings Chart) 
LOCM, LOCAL.COM CORP (Google Yahoo Earnings Chart) 
MGRC, MCGRATH RENT CP (Google Yahoo Earnings Chart) 
MWIV, MWI VETERINARY SU (Google Yahoo Earnings Chart) 
NM, NAVIOS MARITIME (Google Yahoo Earnings Chart) 
NOIZ, MICRONETICS INC (Google Yahoo Earnings Chart) 
OIIM, O2MICRO INTL LTD (Google Yahoo Earnings Chart) 
PLT, PLANTRONICS INC (Google Yahoo Earnings Chart) 
PPC, PILGRIMS PRIDE CP (Google Yahoo Earnings Chart) 
SA, SEABRIDGE GOLD IN (Google Yahoo Earnings Chart) 
SMA, SYMMETRY MEDICAL (Google Yahoo Earnings Chart) 
SOEN.OB, SOLAR ENERTECH CO (Google Yahoo Earnings Chart) 
SPEC, SPECTRUM CONTROL (Google Yahoo Earnings Chart) 
SRVY, GREENFIELD ONLINE (Google Yahoo Earnings Chart) 
T, AT&T INC. (Google Yahoo Earnings Chart) 
TLB, TALBOTS INC (Google Yahoo Earnings Chart) 
TMTA, TRANSMETA CORP (Google Yahoo Earnings Chart) 
TNOX, TANOX INC (Google Yahoo Earnings Chart) 
UIL, UIL HLDGS CP (Google Yahoo Earnings Chart) 
USMO, USA MOBILITY (Google Yahoo Earnings Chart) 
VAR, VARIAN MED SYS IN (Google Yahoo Earnings Chart) 
VSCP, VIRTUALSCOPICS IN (Google Yahoo Earnings Chart) 
WPL, WP STUART & CO LT (Google Yahoo Earnings Chart) 
WRNC, WARNACO GROUP INC (Google Yahoo Earnings Chart) 

What is a strong stock?

How does anyone define a strong stocks? Guess what, the definition differs from person to person based on how that stock is traded. Let's take a friend of mine, his definition of a strong stock is one that offers a favorable return over a long period. Another person would say a strong stock is one that offers a nice return in a single day. The two often differ.

I wanted to see which stock offered the best return last week while still meeting my efficiency requirements. That stock was FFHL. This stock would not have shown up on my scans since it's value fell considerable over the past month.

I changed my RSI scan to look for stocks with a value less than -0.58. If this were true, then the stock must also have a consolidation period of 10 days. If this is true and the stock shows signs of strength after 3 days of weakness, FFHL would have been a buy stock at the end of day 6/18/07, just in time to capture it's major move. I combined this scan with the previous scan, the results for end of day 6/18/07 are:

FFHL, FUWEI FILMS (HOLD (Google Yahoo Earnings Chart) 

This scan should be named to track it's progress. I'll name this one down but not out.

Fridays down but not out scan reveals:
ACLI, AMERICAN COMML LN (Google Yahoo Earnings Chart) 
BLUE, BLUE HOLDINGS INC (Google Yahoo Earnings Chart) 
CTIC, CELL THERAPEUTICS (Google Yahoo Earnings Chart) 
FDP, FRESH DEL MONTE P (Google Yahoo Earnings Chart) 
GOFH.OB, GOFISH CORPORATIO (Google Yahoo Earnings Chart) 
SGN, SIGNALIFE INC (Google Yahoo Earnings Chart) 
VSE, VERASUN ENERGY CO (Google Yahoo Earnings Chart) 

The 3 day strength scan reveals:
BFK, BLACKROCK MUN INC (Google Yahoo Earnings Chart) 
CLWT, EURO TECH HLDG CO (Google Yahoo Earnings Chart) 
KKD, KRISPY KREME DOUG (Google Yahoo Earnings Chart) 
TZOO, TRAVELZOO INC (Google Yahoo Earnings Chart) 
WASH, WASHINGTON TRUST (Google Yahoo Earnings Chart) 

When does short term stock strength extrapolate?

After careful analysis of the stock scan that looks for stocks with 3 days strength, more than half the stocks did not continue to do well in the short term. Since this scan is not meant as a scan for stocks to short sell, I had to re-examine the strategy.

The stocks that did well typically were recovering from a long period of devaluation. I added the criteria of a stock must be devalued over one month. The results were much better. This weekend's scan reveals:
KOMG, KOMAG INC (Google Yahoo Earnings Chart) 

The scan for 3 days of weakness followed by strength for the top half year growth stocks reveals:
CTIC, CELL THERAPEUTICS (Google Yahoo Earnings Chart) 
FDP, FRESH DEL MONTE P (Google Yahoo Earnings Chart) 

Not a bad selection...

Chasing bugs... The programming kind

This morning post was flawed. Any keen reader would have pointed out that the main criteria for picking stocks is having 3 days weakness. Many stocks in the scan did exhibit this trait. After fixing the problem, no stocks showed up in the scan. I wonder that this means in the market?

Since no stocks showed up in the scan, I wondered which stocks were doing well. I created a scan for stocks with 3 days of strength. This returned lots of stocks. I filtered out all stocks with a slow stachostic pk value of more than 70 since these stocks may not have much upside potential. I also filtered out stocks when the pk value is not above the pd value. There were still lots of stocks. I then filtered out all stocks with a 4% gain in a single day over the past 10 days. These stocks are likely to exhibit correction in todays markets due to uncertainty and profit taking.

There were still lots of stocks in the scan. I decided to only accept those stocks with a 10 or 20 day efficiency ratio greater than 0.3 The efficiency ratio is a measure of how well a stock trends in a specific direction. A perfect ratio of 1 means the stock moves the same amount over a given number of days.

These were the stocks in the scan:
BTA, BR LONG TRM MUNI (Google Yahoo Earnings Chart) 
CBAK, CHINA BAK BATTERY (Google Yahoo Earnings Chart) 
CHR, CONVERIUM HLDG AD (Google Yahoo Earnings Chart) 
FD, FEDERATED DEPT ST (Google Yahoo Earnings Chart) 
HBG, HUB INTL LTD (Google Yahoo Earnings Chart) 
IIF, MS INDIA INV FD (Google Yahoo Earnings Chart) 
KOR, KOOR INDUSTRIES L (Google Yahoo Earnings Chart) 
MAM, MAINE & MARITIMES (Google Yahoo Earnings Chart) 
PRFT, PERFICIENT INC (Google Yahoo Earnings Chart) 
SDXC, SWITCH & DATA FAC (Google Yahoo Earnings Chart) 
VSL, VIDESH SANCHAR NE (Google Yahoo Earnings Chart) 

After correcting the algorithm in this mornings post, this evenings scan reveals these stocks:
FDP, FRESH DEL MONTE P (Google Yahoo Earnings Chart) 
PRGX, PRG-SCHULTZ INTL (Google Yahoo Earnings Chart) 
SDA, SADIA S.A. (Google Yahoo Earnings Chart) 

It's interesting to examine the results of the reuters contrarian scan:
AOB
IEHC
MTH
NVR

Most of these stocks exhibit three days weakness and a sign of strength. This fits the form of the above scan, but with a different ranking system. I don't have a good data set of changing stock indicators such as EPS or earnings growth. Reuters does and uses that criteria in the ranking instead of an relative strength ranking.

Momentum algorithm

I've tested a simple momentum algorithm to see if it could offer better potential than rigorous technical analysis. Guess what, it consitantly outperforms my analysis! This leads me to two conclusions, either my technical analysis is poorly done, or simply momentum criteria are the best analysis. The latter could be true since ultimately all analysis enters on strength after a period of weakness.

The criteria for my momentum analysis is:
Half year relative strength greater than 70%
100 * (365.25 / 135 * ((Current Price - 135SMA) / 135SMA)) > 70
Period of weakness, monthly gain less than 10%
100 * (Yesterdays Price - Month Ago Price) / Month Ago Price < 10
Signs of strength
Previous three days of weakness
Volume traded > 10,000

This criteria yields these stocks:
BPHX, BLUEPHOENIX SOLUT (Google Yahoo Earnings Chart) 
GMO, IDAHO GEN MINES I (Google Yahoo Earnings Chart) 
JADE, LJ INTL INC (Google Yahoo Earnings Chart) 
SXCI, SYSTEMS XCELLENCE (Google Yahoo Earnings Chart) 
TGE, TGC IND INC (Google Yahoo Earnings Chart) 

Let's see how they do after two weeks, shall we?