An explainer: "Buses pulling out of the station"

This week in Momentum Monday I introduced a new section within the data table area called, “ Buses pulling out of the station”.

There is a common rule among many charting practitioners that a price rise accompanied by volume increases enhances the chances of price recovery.

To that end we have introduced a new table of stocks where we are trying to find companies who recently have experienced negative / flat sentiment, however now that may be changing due to an improvement in price AND volume. Stage analysis investor Stan Weinstein is quoted as saying, 

“Volume is a gauge of how powerful the buyers are... Never trust a breakout that isn't accompanied by a significant increase in volume.”

The logic behind this quote is quite simple, simply a spike in volume when price is going up means that more traders are committed to entering the stock than leaving it. We can tell their committed because the price is going up at the same time.

Price going up = Each seller is having their offer price filled.

However, Price going up with increased volume = Each seller has their offer (sell price) filled and more buyers are willing to step up to take higher offers as there is a lack of volume lower down.

Coincidently, this phenomenon is flipped if the price is going down and volume is increasing. This pattern means sellers are strong in their conviction and are willing to accept a lower bid (buy) price as they are desperate to get out indicating something bad may be afoot.

The “Bus pulling out of the station” is an attempt to find stocks with bullish potential where the price had been flat of falling for a period, however more recently price has been rebounding (or at least positive)

What we are looking for are stocks that have been flatlining or falling, but price sentiment is changing and volume has supported that over the time period. While there is no specific screen for this in Stockopedia, what I have done for the list is use the screen function with the following criteria to help point us in the right direction to where these events may be occurring:

• Absolute Price change 3mth less than or equal to 3

• Absolute Price change 1mth greater than 0

• Recent Volume surge (10d/3mth) greater than 0

• Market cap greater than $200M

The logic

The screen is trying to find stocks that for the past three months have either been flat ( less than +3%) or negative in price. But for the past month, the price has been positive indicating that the prior sell off may have ended. Further, if the recent volume surge is greater than zero, then more people have been buying recently, than those selling over the past 3 months indicating momentum may be building.

I add the criteria market cap greater than $200M because stocks with less liquidity tend to move on fundamental news, where one development can have a massive impact on price making such patterns unreliable. More liquid stocks tend to have more predictable patterns so I will try to stick with those, however $200M means some small stocks are included as well.

How might you use the list?

This list is only to be used to flag stocks for further consideration, and as the name suggests, it is simply trying to find businesses that have done nothing for some time, but are now improving. Whether they continue to do so is anyone’s guess. Therefore this is not a buy or sell list. You MUST look at the chart to see where the stock is at. The stock may go either way - but at least you will possibly be alerted to a coming positive move.

“IMPORTANT: This list will be updated once a week, however we expect VERY HIGH TURNOVER as normally one would not expect a stock to stay here for a very long time. For example, if the price stops rising and falls it will be removed from the list, likewise if the stock keeps rising, then the past will no longer be flat/falling and it too will be taken from the list.. It is purely intended to be a point in time screen.”

You may also want to look at the stocks on this list and see if there are any with high Quality or Value scores. Hopefully what we are witnessing with the price turnaround supported by volume is a change in sentiment. This screen will like catch stocks before Momentum improves if the price keeps going up.

Risks

As with any scan there will be risks, so being aware of possible deficiencies before you use something is important.

False breakouts - Even though it all works to plan and we pick a breakout to the upside, there is no reason to suggest it will keep going up. You may actually see the breakout lose momentum and the price will fall. While rising volume is an attempt to avoid such scenarios, they can still occur.

Too late - Sometimes there will be massive spikes in price due to positive market news. This can occur with smaller stocks where sometimes volume gives no indication that something is up before the event where the 10d/3m was negative, but then it could turn positive on just that one day's action.

Doesn’t catch everything - This scan relies on a company doing nothing for the 3 months prior and slowly starting to improve. There may be times where a stock is slowly moving up and then also spikes, in this scenario the screen won’t work.

Volatile moves make any trend not obvious: If a stock has been particularly volatile in recent times, what can be presented is a very messy chart. The numbers work because it is a simple mathematical equation, however in reality the chart may not represent that pattern we are after. LOOK AT EVERY CHART!

Not for day traders - Given the time frames involved, this is not a screen for day traders trying to identify possible breakouts. Good news is we would not expect to have many day traders amongst our members.

Not for buy and hold forever investors - this screen is for more active investors with a medium term horizon. Just as it is not suitable for day traders, so too for buy-and-hold investors with long time frames.

Alterations

If you build the above screen you can make adjustments to it to suit your style.

For example: one thing you may want to try is altering the time periods

• Absolute Price change 3mth less than or equal to 3

• Absolute Price change 1week greater than 0

Or

• Absolute Price change 6mth less than or equal to 3

• Absolute Price change 1mth greater than 0

If you are feeling adventurous you may want to remove the market cap criteria, or lower the threshold to $100M, this will throw up some new ideas (but as I said - a little less predictable)

Examples

TLX - Telix Pharmaceuticals

NIC - Nickel Industries

Feedback?

We have introduced this data for the benefit of members. If you think we have missed the mark, have a suggestion or would like to see something else, please provide us with feedback and it will be duly considered.

Now I best run off and try to catch my bus before it leaves the station.

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