FREEZE! You Need A Better Watch List

My 5 Part Series On Building A Watch List

In the month of March I introduced my 9 Simple Steps To Creating a Trade Plan and I received some great responses from my readers.

A lot of people asked me for advice on how to better identify stocks and what exactly they should look for in a stock so I decided to build on my message in the month of April with a new series that covers how I build my watch list.  

As a part of this process I will provide you with a spreadsheet that you can actually use to build your own watch list so keep your eyes peeled for my next post on Friday where I'll have a copy available for download!

In this post I will give a general overview of the philosophy I've put together but each week we'll dig into a specific element so that we can explore it in greater depth.

Where Do I Start? 

I like to picture my watch list stocks flowing downward through a funnel where only the best opportunities make it to the bottom.  In my mind, the top of the funnel focuses on the broadest aspects of the market so I like to review the chart action for the 3 major indices; SPY, DOW, and QQQ to give myself an idea of the general conditions I'm working with. 

After that, I move into the next phase of my research where I focus on the 9 major sector ETF's.  My goal here is to determine which of the sectors is leading the way and has the most action.  Once I have identified the best performing sector, I start looking at the top stocks within just that sector to help give myself some context.  At this point of my watch list preparation I'm reviewing charts with an eye towards the Relative Strength in order to get a clearer picture of a sectors general momentum.


Eliminating Variables

I view variables as barriers to action so now that I'm in the middle of my funnel, I've got to eliminate some to help me narrow things down. At this point I begin incorporating IBD® more heavily into my process. I'm looking for 9 specific things in a stock

1. Relative Strength must be at 90 or higher
2. EPS rating must be at 90 or higher
3. Volume traded per day must be a minimum of $100 million
4. IBD® accumulation distribution rating, B or higher
5. Up down volume must be at least 1.4
6. The stock must be in the top 40 group
7. I look for a general trend that shows me an increase in price and an increase in volume.
8. I review IBD® mini charts and make annotations for the buy point zone.
9. The stock must show increased sales and earnings in the last 2 quarters.

Building The Watch List

Once I've applied the above criteria I can begin putting together a true watch list.  My watch list criteria are very strict but even still, I may add as many as 10 stocks if they fit my framework.  However, I only take 1 position at a time as part of my trading philosophy so at this point in my process, I need to select only the cream of the crop as my prime opportunity for taking a position.

To help me determine which stock gives me the best opportunity for profit I consider the following:

1. Is this stock moving up in relative strength.
2. Is this stock increasing in volume
3. Is this stock showing increased price
4. Is this stock approaching its resistance line
5. Is this stock approaching its buy point

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Now I am at the bottom of the funnel! 

One opportunity has made it through my gauntlet of stress tests so now I'm ready to identify a profit target, establish a loss threshold and, define my window of opportunity

If you're interested in taking a closer look at my methods or if you'd like a walk through of my step by step process please let me know!


Amin Hemani 
investorspotlight@gmail.com