Originally Posted by
mscott
Nicola,
I posted three CANSLIM presentations on this forum over the last month or so. The first two define the entry points for various chart patterns as well as the fundamental requirements for my picks. The chart patterns that occur most often are cup with handle and double bottom bases these are consolidation patterns that occur over a minimum of 7 weeks. I use pocket pivot entries for early entries for stocks that are setting up in one of those patterns.
I use MarketSmith which is a stock charting and screening tool to find stocks, the tool is created by Bill O'Neil. I find that almost every serious CANSLIMer ends up using MarketSmith, actually I do not know of a signle person who does not use it. It is a little pricey for some but for my money the best tool available. Most of my selections end up on one of two indexes in Investor's Business Daily. The IBD 50 Index has top CANSLIM oriented stocks, the list is published in each Monday edition. That edition actually comes out Friday evening in the electronic form eIBD that I read on my computer. The other list is called the Weekly Review also known as the 85-85 list. This list of stocks are all stocks above a minimum price and volume that show an EPS rating greater than 85% of all stocks in the data base and a RS rating greater than 85% of all stocks in the data base. One can run this screen directly in MarketSmith or wait for the Thursday edition of IBD where it is published. So the short hand answer to your question is to use those lists to downselect from.
Beyond what you can read in Bill O'Neil's book How to Make Money in Stocks or through lessons taught in his seminars or in IBD or my presentations I add three additional paramaters to my selections. I have studied stocks that go up and found three parameters positively correlated with price performance: Liquidity Rating, Demand/Supply Rating, and Margin Rating. I develop these rating myself each weekend. I use MarketSmith to download every stock in the database above $5 (usually around 4000 stocks) and then calculate the three ratings which I describe below.
Liquidity is price time 50-day average volume and Liquidity Rating is the 4000 stocks rank order by Liquitity in excel and then by formula a 1-99 rating for liquidity is assigned where 99 signifies top 1% of the stocks by this factor. AAPL comes out on top with a 99 rating as it trades 9.3 billion dollars per day. Institutions perfer liquid stocks, so why not measure liquidity and use it in your selections.
The second factor is Demand/Supply Rating. This is a measure of the demand for a stock compared to its suppy or float. Demand/Supply = 50-day average volume / float. I compute this ratio and then rank order the list of 4000 stocks by this parameter and assign a 1-99 rating to each stock using the same formual as used for the Liquidity Rating.
The third factor Margin Rating is a measure of the margins that the company is reporting. I sum two paramaters ROE and Pre-Tax Margin in excel for the 4000 stocks. I then rank order the list by this factor and assign a 1-99 rating factor to each stock as in the above ratings.
The last factor I use is Bill O'Neil's Composite Rating direct from IBD or MarketSmith. This is a 1-99 ranking of all stocks in the database by a large number of CANSLIM factors.
So now I have four parameters that I sum into a Combo Rank, a simple sum of the four paramaters above. When I rank this list by the Combo score, the stocks I want to possibly buy come to the top. If you think about it, this is a list of stocks that show institutional liquidity, show high demand, have the best margins in the industry and have the best other CANSLIM charateristics. From here I look at stock charts in MarketSmith to down select to 10 or so to put on my watchlist.
I also take the top 100 from this list and paste into an eSignal quote table. I wrote some special formula scripts in eSignal to monitor for pocket pivot developments. Essentially for all 100 stocks in real time I extrapolate end of day volume and compare that volume to the prior ten days and find the stocks that meet the pocket pivot volume signature. I then check for proximity to the 10 and 50-day moving averages. I then alert in realtime every stock that is flashing a possible pocket pivot buy point. I also load the IBD 50 list on another page and do the same procedure. So now I get alerted to stocks that are showing possible pocket pivots early in the day. Usually one-half hour into the market day I have a pretty good list of pocket pivot candidates. I don't do a linear extrapolation of end of day volume, volume usually doesn't come linearly. I developed a sixth order polynomial expression for how volume flows during the course of the average day. I use this to extrapolate end-of-day volume.
I know a lot of the above seems complicated, but you asked how I did it and my mind tends to move in doing technical analysis. I see no problem with using IBD as a resource, looking by hand at each stock in the IBD 50 and 85-85 lists and down selecting from there. That is the way I used to do it. There is a small weekly chart for each stock on these indices published in IBD. They are useful. On eIBD you can blow these up on your screen and directly analyze for the proper stock chart pattern.
Finally if you want to bring in my additional factors above into your selections, simply pick stocks with the following characteristics: Liquidty above $40M per day (with some picks allowed to go down as low as $20M). Demand/Supply > 3% of the float traded per day (with some down to as low as 1%), Composite Rating > 80 and ROE+Pre-Tax Margin > 50% (with exceptions lower). You will find that using this procedure will rapidly weed out the thinly traded stuff that tends to show up in the IBD indices and reduce you to a workable list of stocks.
You should analyze your stock patterns for late stage base formations and mostly stay away from them. I defined base counting in my second CANSLIM presentation. I will post the 4h in the series shortly. Finally if anyone wants a more detailed explanation for how I do any of the above I will gladly share.
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