STOCK MARKET: SEARCHING FOR "TRADING" OPPORTUNITY

There are many ways to find opportunity in the market. The most common technical methods are:

• Search the market using a technical scan.

• Use stock selections identified by other sources, including brokerages, magazines, newspapers and other media. These are a starting point and provide a small group of pre-selected stocks which are subjected to further technical analysis.

• Do an eyeball search of the market. This means looking at the chart of many stocks and identifying those that show strong trends, breakouts or chart patterns.

It’s been several months since we undertook a full eyeball scan of the market. An eyeball scan helps the trader to develop a feel for the market. It develops an understanding of the normal behaviour of trends, breakouts and retracements. It makes it easier to identify abnormal situations. It assists in identifying the chart patterns which are currently enjoying a higher probability of success.

We use two types of eyeball approaches to assess the market.

• A casual eyeball. Whenever we look at a stock for whatever reason, we then also eyeball search through the other stocks in the same alphabetical folder. This takes 5 or 6 minutes. This is a haphazard approach, but over time it covers most of the stocks in the market. The danger in poorly performing markets is that the number of stocks you look at initially is limited because opportunities are limited. As a result it takes a lot longer to cover all the stocks. It’s easy to drift out of touch with the market.

• A systematic eyeball. This is a long process, ideally suited to a long weekend, or the Easter break. The objective is to eyeball every active stock in the market. Even at speed, this is 2 to 3 hours’ work and fatigue – and boredom – is a problem. Even for dedicated traders it’s not that exciting flipping through charts.

As significant market changes develop it is useful to complete a systematic eyeball scan. This week we take you through the steps.

Glance at each chart. If a pattern is not there then it is not there. If a good GMMA relationship is not quickly seen, then it’s not there. If trading is spotty, with little intraday volatility, then the stock is ignored. This may sound difficult, but in practice it’s easy. The chart shown in the screen shot above is a clear reject. Price activity is spotty. The GMMA relationships do not show a strong trend. There are no triangles, saucers or flag patterns in the price chart. It takes less than a second to reach this conclusion.

REJECTS



We look for these combinations of conditions for rejecting opportunities.

• Low level of trading activity. This is a spotty or erratic price chart
• Established downtrend with strong separation in the long term GMMA.
• No evidence of short term GMMA developing trend change activity.
• The GMMA MetaStock Expert display continues to show NO TRADE.

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Daryl Guppy, well-known international financial technical analysis expert. Appears regularly on CNBCAsia and is known as "The Chart Man". He is an equity and derivatives trader and author of books including Share Trading, Trend Trading and The 36 Strategies of The Chinese For Financial Traders. He has developed several leading technical indicators used by investors in many markets. His weekly analysis newsletters get favorable comment in Asia and Australia.