One of my 2011 goals was to implement new trading methods to my existing strategies. Since I exclusively traded mean reversion in 2010 and missed out on a number of great breakouts, I decided to include a breakout trading strategy for 2011. About two weeks ago, I found the Stockbee blog and @easyguru on Twitter, and began reading about his methodologies. I eventually purchased his subscription blog to get the full gamut of information.
The main idea is to buy stocks breaking out and to capture a 10 - 20+ % move in a few days. I created a "StockBee Breakout Scan" in Amibroker. I don't even get Investor's Business Daily anymore. I'm trying to find these stocks strictly through my scan.
[Please click to enlarge]
Let me describe the scan and its results:
This can be done during the day or at the end of the day [Stockbee says during the day is better because you can capture a move as it is happening, instead of the next day. I agree with him, but I'm doing this at EOD for now.] I scan through "Major Exchange Listed" stocks (Norgate Premium Data created this group) for any stock that meets the following for the day:
MDT, STIB SPB, IPO, STIB50 or SDB is true [subscribers know what these acronyms mean] + no 4% down days on higher volume in the last 10 trading days + consolidation scan (I'll explain below) is true.
For example, if a stock meets the criteria for STIB and there are no 4% down days in the last 10 days and it meets my consolidation scan, then it will show up on this list. $ZIXI hit the criteria on 1/7/11.
No 4% down days in the last 10 trading days: I don't want to see heavy selling over the last 2 weeks. Pretty simple. If a stock has these, it is a sign of distribution and potential weakness. I'm sure there are many massive winners that broke out with a few 4% down days over the previous two weeks, but I'm trying to increase my odds for a successful breakout, so I don't want to see any.
Consolidation Scan: This is something I came up with on my own. It is an imperfect scan and may need to be revised, but it tends to capture most stocks in consolidation patterns. If any of the following are true, it meets my consolidation scan.
Maximum price range over the last 5 days is < 7% or
Maximum price range over the last 10 days is < 8% or
Maximum price range over the last 20 days is < 12% or
Maximum price range over the last 30 days is < 15%
Now on to the scan results, column by column:
Ticker, Date, Full Name, Close and % Change: These are self explanatory.
Vol Chg %: Current day's volume increase vs 50 day average volume. This tells me if the stock is breaking out on volume. Preferably there is a 50% or more volume increase.
MDT, STIB, SPB, IPO, STIB50 and SDB: Members know what these are. If a stock meets the requirements, the cell will be colored. On 1/7/11, $ZIXI hit MDT and STIB.
TI: StockBee's Trend Intensity
RSI(2): I will be weary of stocks with a RSI(2) > 95 because it is an indication of an extended stock. StockBee mentions that he doesn't like stock that have gone up 3 or more days in a row. RSI(2) in the high 90's usually indicates that a stock is moving up quickly and a lot. Either it has gone up multiple days in a row or had a major up day (like 10+%). I don't want to buy these (or I'll be extremely selective) because they are extended and due for a pullback.
[The following data is imported from Yahoo Finance]
Short Ratio: Short interest / 3 month volume average. This tells me how long (days) it will take for all short sellers to cover their positions. I want this to be high. I want to be in a stock that is squeezing shorts.
% Short: # shares short / float. The higher the better, just like the short ratio. I want to be a part of a squeeze. A high short ratio and short interest % are ripe for a sqeeze.
REV: Quarterly Revenue Growth (yoy). Not mandatory but > 25% is good. The higher the better.
EPS: Quarterly Earnings Growth (yoy). Not mandatory but > 25% is good. The higher the better.
ROE: Return on Equity. Not mandatory but > 17 is good. The higher the better.
The last 3 columns are quick reference numbers for placing stops, depending on the strategy.
Now on to visuals. Here are some charts:
[Click to enlarge]
Blue Hollow Down Arrow = 4% up on higher volume
Orange Hollow Down Arrow = 4% down on higher volume
Green Up Arrow = STIB50
Purple Hollow Up Arrow = SDB
Look for stocks that are ready to breakout above some resistance. I'd rather buy a stock before it breaches a new high.
So this is how I will find breakout stocks, according to StockBee. I have traded a few plays in 2011; so far so good. Knowing my personality, I will have a quick trigger for profits and losses. If I am buying a breakout the day after a 4% move, I'll probably be looking for smaller gains (5 -10%) and I'll have a tight leash on stops. I'd rather book a gain rather than let it reverse to a loss. It will be a learning process and I will do my best to make it fully adaptable.