Quantitative Price Action Screen: Features to Look For

There are more than 5,000 individual stocks and funds listed on the combined NYSE and NASDAQ. We put those through a quantitative price performance filter to identify those that may be in a short-term upward or downward movement (as of April 13, 2009).

The universe of US stocks was all those with a 20-day average volume >= 100,000 shares, and a 60-day average price >= $1.

We used three levels of stringency.

Level One - Upward Price Action Filter (872 stocks passed):

• Close > 20-day SMA
• 20-day SMA > 50-day SMA
• 20-day SMA > 20-day SMA 5 days ago
• 20-day SMA 5 days ago > 20-day SMA 10 days ago
• 20-day SMA 10 days ago > 20-day SMA 15 days ago
• 50-day SMA > 50-day SMA 5 days ago
• 50-day SMA 5 days ago > 50-day SMA 10 days ago
• 50-day SMA 10 days ago > 50-day SMA 15 days ago

Level Two Additional Upward Price Action Criteria (482 passed):

• Close > 5-day SMA
• 5-day SMA > 20-day SMA
• 5-day SMA 5 days ago > 20-day SMA 5 days ago
• 20-day SMA 5 days ago > 50-day SMA 5 days ago
• 20-day SMA 10 days ago > 50-day SMA 10 days ago

Level Three Additional Upward Price Action Criteria (204 passws):

• Close > Close 1 day ago
• Close > Close 2 days ago
• Close 2 days ago > Close 3 days ago

10 Highest Dollar Trading Volume Stocks Passing Level Three Filter:

• Apple (AAPL)
• Genentech (DNA)
• MasterCard (MA)
• Schlumberger (SLB)
• Baidu (BIDU)
• Chicago Mercantile Exchange Holdings (CME)
• Ford (F)
• Chesapeake Energy (CHK)
• Northern Trust (NTRS)
• Anadarko Petroleum (APC)

Caveat, Caveat, Caveat:

You are best served by purchasing and owning securities that are rising, as opposed to falling, however, the investment must make sense for other important financial and conceptual reasons. Price action filtering is just one way to reduce the work load for one-by-one research.

You can approach the universe reduction process by filtering for price action first or by filtering for fundamentals or valuation first. We use all of those approaches. This article describes the price action filter route.

Even thought stocks pass through the filter, it is just a beginning. It says nothing about the fundamental financial situation for the company (growth, profitability, solvency, leverage, cash flow, etc.). Passing the filter also says nothing about the valuation of the company (EV/EBITDA, P/E, P/S, Yield, etc.). It says nothing about the “story” of the company (qualitative, narrative about what it does and how it fits into the going forward economy). Price action filters also say nothing about the company or industry specific risk factors that face each company.

There can be some stocks with nice looking price charts that are really unattractive from other perspectives, and visa versa. The key to success is to own stocks that have all of these features at the same time:

• good stories
• solid financial fundamentals
• attractive valuation
• understandable and acceptable risks
• rising price action

Note that quantitative price action filters are no substitute for a final visual inspection. There is no way to practically program a numeric screen that can capture as much data as the human eye. Here is an example of a company (SLB) that passes the price action filters, but is still lackluster in our opinion based upon visual inspection:

We very much like the story of this stock, however, and believe the financial fundamentals will be attractive as oil prices eventually recover with consequential increase in drilling and servicing activities. This is one to watch. It is basing nicely and will likely surge when the oil fields become busy again.

Some Examples of Companies Passing the Upward Price Action Filter:

Filtering for Downward Price Action:

If we reverse the operators on the criteria by changing the “greater than” signs to “less than” signs, we find that 62 stocks pass through Level One; 25 stocks pass through Level Two; and 6 stocks pass through Level Three.

Since the total stock universe includes ETFs, and since ETFs include short and double short funds, most of the worst performers are of the short variety during this recent rally. One individual stock doing poorly is the once darling Silicon Graphics (SGIC).

Comments

[winindthedust:]

Maybe we've already seen adequate consolidation with Apple..... looks like a repeat of last years highs.

Apr 16 03:04 PM

[Robert DiAl...:]

Some interesting comments and ideas. I will give this a more detailed review. Thank you.

Apr 21 09:10 AM