|Screening with price and volume ratios|
Stock screening with price and volume ratios
In this newsletter, we will be building a screen based on price and volume growth. Combining these attributes in your screens just might add that little edge you have been looking for.
The 5, 20 and 50 day SMA and the 5, 20 and 50 day price ratio
The 5, 20 and 50 day ratio is the percentage difference from last close compared to the 5-day price average (sum of last 5, 20 and 50 closes divided by 5, 20 and 50 respectively). The simple moving average is the sum of the last 5, 20 and 50 closes and divided by 5, 20 and 50. Repeat for every day to create a line. The major difference, is that as a larger number of days is applied, the less sensitive the average becomes to the price movement.
Since moving averages are trend following systems, using a combination of numbers is ideal. The smallest value gives the warning and the largest value confirms the trend. In any breakout, the 5-day SMA will cross the price first, then the 20-day SMA; the 5 and 20-day cross; and, nearby/soon, the 50 day SMA crosses the price. Acting on the 5-day SMA is typically considered far too risky, while waiting for the 50-day SMA might put you in at the halfway mark. So in this case, we will be looking for the 5 and 20 cross -- and if the chart looks fine, then it's time for some grunt company analysis. But for now, we will only be looking at the screening stage.
In general, the following concepts apply when using moving averages and ratios:
Screening for your stocks
We will create a screen for the chart characteristics that are highlighted in the yellow box below.
This screen should be modified to suit your strategy. Here, it is mostly intended to describe the use of moving averages and ratios to screen for stocks. As in all cases, after you find a particular chart you are interested in, based on your trading system, further company analysis is highly advised to confirm the chart pattern/breakout. Companies that can meet both technical and fundamental scrutiny have higher success rates.
In the case of INTC, we will focus on several key chart characteristics. The technical portion for our screen will include a 5 and 20-day MA cross, and a price ratio that is above the 5 and 20-day MA yet below the 50 day MA. The problem with the signal in this chart, is that within the yellow box there was not any noticeable volume spike. The volume spike is a strong indicator of a trend change rather than just a correction. In this screen, we will also ensure that volume is increasing rather than declining by including a volume ratio (you can always run the inverse screen and look for shorts by changing the technicals from buy to sells, and using the less-than operator for the ratios).
Technical 1: 5-20 MA cross within the last 30 days
Technical 2: 50 MA cross within the last 5 days
Fundamental 1: Price ratio 5 day - greater than or equal to - 1.01 (the price is trending up (on average) for the last 5 days and closed 1% over the 5 day average)
A total of 46 matches resulted in the above screen. Sorting the list by price growth, or by adding/replacing technicals to the screen, will greatly affect your Top 10. In this case I have not sorted the list to any particular order. When charting the results, you will find that while the moving averages and ratios match the search, some of the results tend to be too far up the trend or not acceptable for another particular reason. This screen should be modified with additional technical or fundamental criteria that match your trading style/system.
Putting ChartFilter into context
To build screens that match your trading style, start with a chart similar to the Intel chart above. This can be done for any trading style or system in 4 quick steps: