Scanning Stocks for Nicolas Darvas Style Breakouts

I think that my strategy of buying stocks making new 52 week highs or all time highs works for any market, but what makes the stock market different from other markets is that, unlike the Forex or commodity markets, there are thousands of stocks to choose from.

With so many stocks to choose from, I rely heavily on scans to narrow down a universe of about 10,000 stocks to a more manageable number.

I use Stockcharts.com to perform my scans and there are five scans that I go through, which I will summarize below:


1) Breaking out of consolidations to new 52 week highs: 

The chart above shows an "ideal" example of what I am looking for.   The scan looks for stocks that have been consolidating for the past 4 weeks or longer and are now trading at a new 52 week high.



2) Above average weekly price advances: 

Because I believe that strength tends to beget more strength, I scan for charts that display bullish, tall, weekly candles.



3)  Volume scan #1:

When I buy a stock, I have little or no knowledge of what product or service the company provides.   However, if you follow volume patterns, you can end up trading with the smart money anyway.



4)   Volume scan #2: 

This scan looks for stocks whose volume is significantly higher this week than last week.



5)   Volatility Contraction scan: 

This scan looks for a major decline in a stock's volatility as measured by bollinger band width.    Often, volatility for a stock will decline before a major explosive move.

If you are interested in creating your own scan with Stockcharts.com, but are uncertain as to how to code it up, please contact me.


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German, Japanese, Canadian Stocks at New Bull Market Highs

A simple rule of thumb that I have developed through analyzing charts each and every day for 8 years is that when a market makes new all time highs, that is bullish.

I am, therefore, bullish on German stocks, since they too have broken out to new all time highs:

The chart above is a long term monthly chart of the German DAX.    Notice, as well, that German stocks are barely trading higher than they were in the year 2000.

I've been reading a lot lately that stocks are super over-extended and in a bubble.   Based on the fact that most stocks, even US stocks, have made almost no progress in the past 13 years, I do not share this opinion.

If you think making no progress in 13 years is bad, then consider Japanese stocks, which are trading at the same level they were in 1986:

Zooming in, here is a weekly chart of the Japanese iShares, EWJ:

The weekly chart above shows what, to me, is a bullish flag on the verge of breaking out. 

Finally, even Canadian stocks are making new highs: 

Bottom line:  globally, stocks are currently rising and making new all time highs, or at least 52 week highs.   Why fight that trend?

Six Reasons why Trend Followers Know the S&P 500 is in a Secular Bull Market

1) The S&P 500 keeps making new all time record highs.   This started happening again 14 months ago, which I pointed out here.  Since that time, the market has continued to print hundreds of new all time highs and is, at this very moment, at yet another new all time high.

If any market is printing new record all time highs, that is always a sign that a major bull market is underway.





2) The Dow Jones is breaking out of a 12 year consolidation period, which I pointed out using this 112 year Dow Jones chart .

Generally, if a market consolidates for a decade or two then breaks out, that is a positive development.





3) Foreign markets, for example the German DAX and the EAFA index are hitting new highs.  If foreign markets are surging ahead, that is another sign that stocks are in a secular bull market.





4) The perma-bears have been spectacularly wrong.   Since the year 2008,  I have heard those who have said that the US Dollar would implode, silver would go to $100 an ounce, the worst place to invest your money would be in American stocks, and the best place to take refuge during the imminent and inevitable hyper inflationary collapse would be in gold stocks.

I admit that this all seemed plausible at the time, but the pure price action of the market told a different story.

First of all, for the last two years, American stocks, rather than being the worst place to invest your money, have been the best place and have done much than gold has.   In fact, gold entered into a bear market 16 months ago and has not looked back.   Finally, instead of being the best place to invest your money, gold stocks have been literally the worst sector for several years now.

If money is fleeing these safe haven assets, as was the case during the beginning of the previous secular bull market in 1981, then that is a positive development for stocks.





5) Leading stocks, such as Google, have led the Nasdaq to new 12 year highs.   This is another sign that we are in a major secular bull market.





6) The VIX Index, which measures the level of fear in the market,  has been in a major downtrend, despite what you may have been led to believe by watching the news.   If the VIX keeps hitting new lows, that's a sign that we are in a major bull market.

Thoughts on Nick Radge, Michael Covel and The Fountainhead

Last week, I talked about how trend following traders have difficulty appealing to the general public due to the volatility they experience.  

Because novice traders prefer a smooth, steady and predictable equity curve, they erroneously conclude that trend following is too risky, even though in the long run, the opposite is true. 

But couldn't trend followers change their strategy in order to appeal to the masses;  to create something more middle of the road that would suit everybody?  

This thought, along with a superb YouTube video by Nick Radge as well as Michael Covel's recent podcast, inspired me to create my own YouTube video.   Enjoy:

Why do Trend Following Traders Win the Money that Novice Traders Lose?

I find that the world of trading is filled with paradoxes.   In this post, I will discuss one of these paradoxes: 

• Traders who have a high win rate appear safe, yet actually tend to be fragile and risky.   

• Traders who have a low win rate appear risky, yet actually tend to be robust and safe. 

We are taught in school that good grades are desirable and those with higher marks will end up achieving greater success in life.  Paradoxically, in the world of trading, it's just the opposite:  traders who have very high win rates are prone to failure.  

For example, I have identified one money manager who has a win rate of 98.6%.    This means that out of 100 trades, about 98 or 99 will be closed out at a profit.   To the novice trader, he sounds like a genius, that he must have found "the secret" of trading, or "the holy grail".   

In order to achieve this, the money manager does not sell a position for a loss, but instead doubles down.  After averaging down, if the position is still in the red, he will average down again.   This goes on indefinitely, until the position can eventually be closed out at a profit.  

The problem lies in the 1% of the time where you keep averaging down, but the position does not revert to the mean and keeps on trending.  You keep averaging down, over and over, until you reach the point where you run out of money and you find yourself, well, completely bankrupt. 

Here is a picture of this money manager's equity curve: 

The equity curve initially appears safe and steady, but contains an extreme amount of risk lurking under the surface.   

The unfortunate clients of this money manager are what Nassim Nicholas Taleb would refer to as turkeys, as the following quote from his book, The Black Swan, illustrates: 

A turkey is fed for a thousand days by a butcher; every day confirms to its staff of analysts that butchers love turkeys “with increased statistical confidence.” The butcher will keep feeding the turkey until a few days before thanksgiving. Then comes that day when it is really not a very good idea to be a turkey. So, with the butcher surprising it, the turkey will have a revision of belief—right when its confidence in the statement that the butcher loves turkeys is maximal … the key here is such a surprise will be a Black Swan event; but just for the turkey, not for the butcher.

As for me, I do not have a 98.6% win rate.   I have a 53% win rate, and my equity curve does not look safe and steady, but rocky and lumpy.   To a novice trader, it does not look very attractive at all. 

I'll leave you with three quotes:

• The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance.

-William Eckhardt

• The equation is simple - most important is how much you win when you win, and how much you lose when you lose. Forget right or wrong.

-Nick Radge

• Any strategy that gives you a steady 1% a month is probably Bernie Madoff or Long Term Capital Management (i.e. soon to be exposed or busted).

-Michael Covel