Four Characteristics of a Stock Poised to Explode Higher And One Trait

That Will Get in the Way!

The author, Mary Ellen McGonagle has been helping professional money
managers outperform the markets for over 20 years. She’s been interviewed by
USA Today, U.S. News and World Report and she is also a frequent contributor
to Stockcharts.com.

As of the end of last month, there were over 5,000

stocks and another 2,700 ETF’s. With so many stocks and ETF’s in the
U.S. markets, choosing one that is poised to outperform the markets
may seem like a daunting task.
But don’t be discouraged by those numbers. I’m here to tell you that
there IS a way to spot stocks that are ready to take off. It may require a
bit of diligence on your part. Just a few minutes time to set up a system
that will alert you to these names and put you on the path to better
returns.
For the past 25 years, I’ve been helping top-performing portfolio
managers uncover names that are beginning to come alive so that they
can take advantage of these upward moves. Oftentimes, portfolio
managers provided me with a list of the stocks in their mutual or hedge
funds but more often, I would have a list of their idea stocks. Those
companies with promising fundamental characteristics but the stocks
weren’t quite “ripe” enough to be included in their portfolios. Both
lists would be used as a hunting ground for me and it was my job to
alert them when certain key characteristics occurred simultaneously
and the stock looked ready to go much higher.

So to start, you’ll want to have a list of promising stocks. That is,

companies that have a competitive advantage, are in a growing sector
of the markets and most importantly, have strong earnings and sales
numbers to support a sustained move upward. A service such as my
MEM Edge Report would be ideal. I’ve done all the hard work
screening for these superior stocks that are poised to take off.

Let’s Start at the Beginning

First of all, what moves a stock higher? Quite
simply, it’s more buyers who want to own a
particular stock vs the number of sellers who are
willing to sell their shares to those buyers. But
here’s the key. It’s not just buyers like you and
me that are going to move a stock in a significant way. Of course, they’ll
always be small, thinly traded stocks that will pop for a day or two but
I’m talking about quality companies that will go higher for a lengthier
period of time. The kind of moves that can make a difference in your
overall performance.
The reality is, it’s the big fund managers who are really going to move a
stock for any sustained period of time. These managers are investing
millions of dollars every day and this kind of activity is what makes a
stock go higher.
And this brings us to one of the 1st key components that can alert you
to a stock on the move.
1) Volume – You want to be keenly aware if your stock is trading on
above average volume. Above average volume indicates that the
big hedge funds and mutual funds are in buying and it often
indicates that interest in your stock is starting to pick up. Every
stock has an average number of shares that it trades on a regular
basis. The most common metric used by institutions is the daily
average traded over the last 50 days of trading but some services
out there use the average volume over the last 10 days (NASDAQ
website), while others use the average volume over the last 3
months (Yahoo Finance). All of these tracking services can work
as you are comparing the current day’s trading volume to the
historical daily average volume for that particular company.
You want to see the current day’s volume trending above its daily
average. In addition to the sites mentioned above, most online
trading platforms will provide you with this information and all of
the trading software companies have it as well.
This pick-up in volume can be triggered by an event such as a
positive earnings report or the release of a new in-demand
product but the best use of the volume indicator is when there is
no real news. Many institutional investors will begin accumulating
a stock because they’ve done the due diligence and have insight
into the growth prospects for a given company. They’ve visited
the company, met with management, checked the distribution
channels and investigated the competitors. They’re buying the
stock because they believe in the company and the management.
 A pickup in volume after an announcement is also valid. Indeed,
these stocks can often move up an impressive amount after an
event but if you can get into stocks on the move before any major
announcement, your gains can be even greater.

Of course, a one day spike in volume alone won’t provide you

with the keys to a big mover. Let’s move on to some of the other
critical components.

2) Industry Group that the Company is in.

Knowing which industry groups are in an
uptrend and are strong can really help
you get in front of stocks before they
have a big move. You want to make
sure the stock you are buying is part of a
strong Industry Group because the
overall trend of an industry or sector will
always have weight in determining the direction of a stock’s
move. Studies have shown that group affiliation of a stock has a
huge impact on its potential. You want the wind behind your sails
by participating in an industry that is being favored by the
markets. This will increase your odds.
One way to stay on top of which groups are being favored by the
markets is to pay attention to ETFs. These Exchange Traded Funds
contain baskets of stocks that are centered around a particular
industry. For example, the entire Technology sector can be
monitored using XLK which is the largest ETF to cover this sector.
You can then drill down to individual areas within technology such
as semiconductors with SMH. The same with Healthcare where
 you can keep an eye on XLV for the entire sector or BIB which
covers the Biotech stocks that are within the Healthcare sector.

3) Beware of Overhead Supply – It’s important to pay attention to

the current price of a stock relative to its price over the prior 3
months or so. If the current price is 10% or more below the
highest price during that 3 month period, then the stock has
“overhead supply”. Those buyers who have lost money on their
recent purchase are now waiting for the stock to come back up in
price so they can get out. Overhead supply can dampen the
near-term possible advance of a stock.

The example below shows a stock where overhead supply was far
enough away to not have an impact. Because the stock hit a new
high over a year ago, most of the real selling is out of the way.
4) Moving Averages – This is a perhaps the most important
component in buying stocks because it helps you with the timing.

The moving average is the average price of a stock over a

specified period of time and it’s depicted by a line on the price
chart.

In the example above, the stock is trading above its key moving
averages - the red is the 50 day and the blue line is the 200 day -
which is bullish.

For a daily price chart, you want the current price to be above its
10, 50 and 200-day moving average. You also want to see these
key moving averages trending upward.

You do not want to buy stocks that are trading below their 50 or
200-day moving averages. These averages can act as powerful
barriers if the current price is below them.

These four important traits listed are part of a broader even more
detailed list of items you’ll want to be aware of so that you can
capture stocks poised to take off.

Services such as my MEM Edge Report will educate you on the

other key traits, as each selected stock is accompanied by a
marked-up chart identifying them.
 Here are the 5 important traits that we’ve reviewed:
1) Volume – Key component of a stock on the move
2) Overhead Supply – Can dampen an upward move as sellers get in
the way
3) Moving Averages – Critical to timing to avoid losses and increase
gains. You want to buy stocks above key moving averages and
avoid those breaking down below these averages.
4) Industry Group – Make sure your stock is in a group that’s being
favored by the markets
Remember, these are characteristics that professional money
managers have been looking at for years. By screening for these
proven set-ups, you can use this powerful information that will
help you outperform the markets.
For more information about our other educational products please
visit us at MEM Investment Research
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