How do you narrow down your watchlist to the names that win?
Use this tool to improve your odds.
I’ll be frank with you: we’re all watching (pretty much) the same names.
Take a look at the public watchlists from successful traders, and there’s a huge amount of overlap in the stocks they’re watching.
The secret to beating the market isn’t to find that sexy name before everyone else.
It’s about taking that group of hot names, and narrowing them down every day to the ones with the best chance at making you money.
Everyone wants to know which stocks to pick from their list…
But that task becomes a lot easier when you can narrow down the choices.
Over the past few months, I’ve noticed there are 4 questions I ask before I consider buying any stock.
If I don’t like the answers, I skip that name that day.
The ones who answer all 4 with a passing grade go to the top of my buy list.
Question #1: How Far Is the Stock From Its High?
This is usually the first thing I check.
I’d rather buy a stock that’s trading near its high than one that has recently crashed.
When a stock has fallen a long way, a lot of the people who bought it on the way down are still holding at a loss.
Many of them sell when the stock bounces back toward what they paid. That selling makes it hard for the bounce to keep going.
An example is AppLovin Corporation (NASDAQ: APP).
On August 3, APP closed about 45% under its high.
It bounced the next day and then kept falling.
A trader who bought it at the August 4 open was down about 25% by the August 17 close.
I’ve lost money buying dips in stocks that had already crashed. So now I avoid these.
Question #2: How Much Has The Stock Moved?
Every stock has a normal amount it moves in a day. Traders call it the average true range.
I compare how far the stock has moved today to its normal daily move. The further today’s move is past its normal daily move, the less I want to buy it.
When a stock is already far past its normal daily move, the buyers who wanted in on the news have already bought. The news is priced in, so there’s less buying left to push the stock higher.
I only use this check on bigger stocks that trend over days or weeks. I skip it on small-cap runners.
One stock I passed on this way was New Era Energy & Digital, Inc. (NASDAQ: NUAI), on September 21.
When I looked at it that day, NUAI was up 25% on news.
NUAI’s normal daily move is about 11%.
NUAI closed that day up 30.55%. It hasn’t closed above that day’s close since.
A trader who bought it when it was up 25% was down about 5% at the close on Monday, September 28.
Question #3: What Is The Market Doing?
Most stocks follow the market, so I check what the market is doing before I buy anything.
In my trade plans for Monday, I wanted buyers to keep defending the key moving averages.
SPDR S&P 500 ETF Trust (NYSE Arca: SPY) tracks the S&P 500.
On Monday, SPY fell 0.74%. It closed just above its 20-day moving average.
None of the nine stocks on my Monday list met my buy condition by Monday’s close.
Question #4 – What’s On The Calendar?
Before I buy, I check the stock’s upcoming earnings, offerings, warrants, deals and other announcements.
I can’t know ahead of time how a stock will move on its earnings report.
Micron Technology, Inc. (NASDAQ: MU) reports its fiscal fourth-quarter results on Wednesday, September 30.
Its call with investors is at 4:30 PM ET.
If I buy MU before then, I’m holding it through that report. I’d rather wait and watch how the stock reacts to it.
With small caps, I check for offerings and warrants.
A company that needs cash can sell new shares in an offering. Traders who know an offering is coming short the stock ahead of it.
A warrant lets its holder buy new shares from the company at a set price.
When the stock gets to that price or a little above it, the holders can use their warrants to buy the new shares and sell them.
Because of that selling, buyers have a hard time pushing the stock above the warrant price.
If there’s too much new stock coming, I stay away.
Tonight, take your watchlist and run every name through these 4 questions.
Cross off any name that fails one of them. The names that are left are the ones worth making a trade plan for.
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Stay sharp,
Jack Kellogg
*Past performance does not indicate future results
