Trader’s Narrative

I just found a very cool tool over at the NY Times website which allows you to quickly identify high relative strength stocks. I love the graphical user interface. It is very intuitive and makes using the tool actually quite fun.

Each stock is represented by a circle whose size denotes market capitalization. All the stocks in a sector are shown within the four quadrants of the grid. They are classified as either slipping, leading, lagging, or improving depending on their relative performance to the S&P500. You can also change the length of the look back period (day, week, quarterly and annual).

As you cursor over the stocks or circles, you’re shown detailed data, both on the grid and to the right side where all the stocks in the sector are listed:

As you can see above, within the energy sector, it shows Weatherford as the stock with the highest relative strength (for the past quarter). And if you click on Weatherford on the right hand side menu, a small graph will popup showing you both the price action of the stock and the S&P500 index (covering the time period you’ve chosen). There are some other goodies that pop up within the right hand side menu but I’ll leave you to explore that on your own.

While most were busy watching and trying to trade all the red on the tape today, if you were using a simple filter such as new 52 week highs, you would have seen this:

I noticed EAG where the green arrow is marked on the graph. It is a stupendiferous example of expansion and contraction. Textbook example, wouldn’t you say? It was also telling that while the market was tanking this tiny little stock almost doubled.

Notice that the fireworks didn’t happen until many others saw the same thing and piled on (volume in purple square). But before then you had a very tight contraction in price that offered a very low risk entry. Trouble was that with the lack of liquidity you would have gotten very little stock handed to you.

Over on the short side, Rio Tinto, the quintessential resource play, gapped down and tried valiantly in the morning to recover. After two up candles, it couldn’t anymore and down it went, taking the low of the morning as well as the previous two day’s low ($221). After it broke this important intra-day support line, it consolidated just under that level - offering a low entry point, as expansion was followed by contraction.

This is why I heart filters. All great traders that I know of, use them. Some even go as far as programming and designing their own proprietary ones.