Number 20

Please note that we have used historical data. These examples are for educational purposes only.

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Using Buy & Sell Signals & Screening Stocks

In this issue of ChartHelp we'll look at the use of technical buy & sell signals.What are some of the most popular? I've listed some of them in a handy reference format below.

Many investors make investment decisions - or would like to - based on signals from their favourite technical indicators. The biggest challenge, however, is finding stocks that are giving the signals that we're looking for. Suppose you like to trade stocks that have recently exhibited a "bullish MACD crossover" or a "bullish Price Channel breakout," or some other trading signal. Finding such stocks has traditionally been a matter of checking a large number of charts based on analyst reports, broker's recommendations, hot tips, newspaper articles, unusual volume etc. Finding stocks has been a matter of luck and persistence, in most cases.

Wouldn't it be great to be able to enter our favourite trading signals into the computer, and have the program spit-out a short list of the best stocks based on our criteria?

A group of us involved with ChartFilter.com have developed a sophisticated screening and alert system based on using technical buy & sell signals. Until recently, most screening applications have been based on fundamental criteria, rather than technical indicators, so these new tools are very welcome additions to the technical analyst's toolkit. Using ChartFilter StockTools, for example, traders can select from a set of over twenty-five trading signals, including the most popular, such as MACD, stochastics, RSI, momentum, Bollinger bands, ADX/DMI and the Demand Index. The program will then scan through the entire universe of North American and London securities and return a customized list of stocks that meet the requested criteria - within seconds.

The following table provides a very useful, concise overview of trading signals offered by some of the more popular technical indicators. Please remember, however, that an individual signal should never be acted upon without considering other indicators, as well as fundamental criteria and market trends. A more comprehensive list of technical indicators and their trading signals is presented on the ChartHelp website at http://charthelp.com/signals.htm

Popular Trading Signals

The table below lists some of the most popular indicators and signals. In some cases, there are two sets of signals described (e.g., MACD - signal line crossovers & zero line crossovers). In these cases, both are valid signals; however, suitability varies based on different circumstances and trading objectives. This table is offered as a rough guide only! Please read the individual lessons in www.ChartHelp.com before making trading decisions based on these signals.
Indicator	Signals
Av. Directional Mvmt Index (ADX)	Buy when ADX crosses up through 25
	Sell when ADX crosses down through 20
Commodity channel index (CCI)	Buy when CCI has crossed below -100, formed a bottom below -110, and then crossed back up through -100.
	Sell when CCI has crossed above +100, formed a peak above +110, and then crossed back down through +100.
Directional movement index (DMI)	Buy when +DI crosses up through -DI
	Sell when +DI crosses down through -DI
MACD Oscillator	Buy when MACD crosses up through Signal line
	Sell when MACD crosses down through Signal line
	Buy when MACD crosses up through Zero line
	Sell when MACD crosses down through Zero line
Moving averages (MA, EMA)	Buy when 20 day MA crosses up through 100 day MA
	Sell when 20 day MA crosses down through 100 day MA
	Buy when Price crosses up through 100 day MA
	Sell when Price crosses down through 100 day MA
Parabolic indicator (SAR)	Buy when SAR switches from above Price to below
	Sell when SAR switches from below Price to above
Price channel (Donchian's)	Buy when the Price penetrates and closes above the upper channel line
	Sell when the Price penetrates and closes below the bottom channel line

Screening stocks based on Price Channels

Based on some research that was conducted a few years ago on 23 trading systems, moving averages and channel breakouts came out as the top performers. In a 1990 issue of the Financial Review, Louis Lukac suggested a channel breakout as the best starting point for technical trading.

Given the value of channels, I decided to use StockTools to screen all the stocks in North America for those that exhibited buy signals based on the Price Channel and MACD Oscillator indictors, as shown in the table above.(More specifically, I screened for stocks where the Price had closed above the upper band of the Price Channel in the past day and the MACD oscillator had moved above its signal line within the past 5 days.)

From over 17,000 listings on the North American exchanges, the program gave me a list of just 59 stocks... in seconds.Here are the top ten results, sorted by volume:

Let's take a look at the 6-month daily chart for the top listing, GILD (NASDAQ):

 

The very first stock listed represents a winner, based on my trading experience.

1.       The stock is in a stable long-term uptrend; and has broken upwards out of a period of congestion - a profitable pattern, especially for mid- to long-term investors.

2.       MACD is in positive territory (above zero), and broke up through its signal line a couple of days ago.This is a sign of a strengthening move in the direction of the uptrend.

3.       The price closed above the upper band of the Price Channel in the last trading session.Another bullish sign.

Let's take a look at the one-year chart and include a couple of complimentary indicators this time; a volume indicator (PVT) and Parabolic SAR:

Here we can see that the Price Volume Trend is uptrending and Parabolic SAR (green dots) is below the price, which once again confirms the bullishness of the other indicators.(I always like to refer to at least one of the volume indicators - OBV, PVT, Moneyflow, etc - because it is complimentary to the other indicators based on price).In addition, from past price performance, we can see that the $60 level offered resistance last Sept/Oct.If this stock continues to push past $60 we would have strong confirmation that GILD will be breaking new ground in the near future.

In a matter of a few minutes, I've uncovered a stock with good upward potential using the power of a sophisticated screening tool. This is just one simple search based on a couple of indicators. I've also had good results with a number of other indicators and systems, including Wilder's system using Directional Movement (ADX) and Parabolic SAR.

The benefits of using trading signals for timing transactions and uncovering stocks is becoming increasingly recognized. At the same time, the tools available are becoming more powerful, and now they're finally becoming available to average investor.

For more detailed information see the ChartHelp reports on using Trading Signals, particularly Price Channels, MACD, and Parabolic SAR.

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Putting ChartFilter into Context

ChartFilter is meant to complement your overall trading knowledge and decision-making. This newsletter focuses on applying technical analysis (TA) methods to various markets; but this is not to say that you shouldn't be considering important fundamental criteria, such as EPS or revenue, as well. Think of ChartFilter as your TA assistant; not as your overall trading strategist.

There's lots more to come! Your comments or suggestions are always welcome; e-mail us at Newsletter@ChartFilter.com.