CHOOSING A STOCK WITH BULLISH CHARACTERISTICS, FROM A STRONG SECTOR
Everybody’s trying to increase their odds by using various strategies and adding filters to narrow down their choice of stocks.
My personal approach is to use the following filters:
- Choose stocks only from Sectors that are relatively strong at the time of trading.
- Examine the weekly chart of the stock, in addition to the daily chart.
- In both the daily and the weekly chart, I want the Relative Strength of the stock to be going up, which means that the stock outperforms my benchmark, which is SPY.
- Apart from the above, I use some Technical Analysis tools, such as Moving Averages, Bollinger Bands, as well as PPO (MACD measured as a percentage) and MFI (Money Flow Index that takes volume into account).
So, I start my analysis by calculating the long- and short-term strength of the 11 US Sectors. Here are the results:
From the above graph, I choose the Technology Sector, as its momentum is quite promising.
Let’s look at the technology sector’s daily chart.
As we can see in the above chart, XLK is moving in a strong uptrend between its 10-day moving average and the Upper Bollinger Band.
XLK’s momentum is also evident in the PPO, which is moving up and above its Signal Linge.
In addition, XLK’s Relative Strength is moving up and above its 20-day moving average.
So, let's choose a stock from the Technology Sector.
Here's the daily chart of
NET – Cloudflare Inc. - a large-cap stock belonging in the Technology Sector.
For more than a month the stock had no trend and its price was moving in a narrow range between 116$ and 126$ (the brown box).
Then the bulls reacted and moved the stock above its 10- and 20-day moving averages and along the upper Bollinger Band, a sign of a strong trend (green box).
The stock's Relative Strength is also moving up and above its 20-day moving average (the green box).
Another filter I’m using is to do some basic Multiple Time Frame Analysis. The weekly chart can reveal interesting info about the stock’s behavior that is not evident in the daily chart. So, a stock may seem a good trade in the daily chart, but show some weakness in the weekly chart.
Let's have a look at the stock's weekly chart.
In the period between November 2020 and April 2021, the stock was not trending (brown box).
The stock has been moving in a healthy uptrend between its 10-week moving average and the upper Bollinger Band since last May (green box).
In addition, its Relative Strength is also moving up and above its 20-week moving average (blue box).
Let's sum up:
1. We choose a Sector that shows Relative Strength
2. We then choose a stock from this Sector that has a healthy uptrend and Relative Strength in the daily chart.
3. We check this stock in the weekly chart to make sure that there's also a strong uptrend and Relative Strength in the longer time frame.
In short, I'm trying to improve my chances by choosing a stock from a strong sector that has bullish characteristics and Relative Strength both in the daily and the weekly charts.
Please tell me what you think of this approach.
