How to “order” like a gourmet from the *Blue Plate Specials* menu

I spend a couple of hours a day putting together the Blue Plate Specials that appear in the right-hand column of the website. Many people have written expressing their thanks for my efforts, but I’ve also received messages from people who weren’t sure what it means nor how to use it. To all of you in the latter group, don’t despair for I’m dedicating as many blogs as will be required (hopefully no more than fifty–okay, maybe three at most) to adequately explain the information contained in the menu and provide tips on how to use it.

So, unfold your napkins and get ready to be served!

How the Blue Plate menu is generated
Menu selections are based on technical analysis of stock charts that are sorted according to specific price and volume criteria. My charting program uses these data to organize stocks and ETFs into specific “Hot Lists.” Each list is comprised of the top 100 equities and ETFs that fit the list criteria. The Hot Lists that I use most frequently are New Yearly Highs (and Lows), Percent Gainers (and Losers), Point Gainers (and Losers), Unusual Volume (that is, those stocks that are trading significantly above their average daily volumes), Unfilled Gaps, Positive (and Negative) VWAPs*, Trade Rate, and Volume Rate. Even with all of these lists, there are still stocks that slip through my fingers.

I go through each hot list looking at the daily chart of every stock on it. When one of them fits the technical criteria that I’m specifically looking for, I add it to that menu category. So that you can see what I look for chart-wise, I’ll be providing current examples.

Let’s see what’s cooking on the Blue Plate menu…

Selection parameters
*Only equities and ETFs that trade on US exchanges are included.

*In bear categories such as Breaking Down and New Yearly Lows, only stocks trading above $5 are included since it’s the policy of most brokerage firms not to allow shorting of stocks under $5.

*Commodity and Sector selections are all US exchanged traded funds (ETFs) but futures traders in these areas may wish to make note of the movement in the corresponding ETF.

Bull Menu categories

Breaking out to new highs:
Hot Lists: Stocks are selected primarily from the New Yearly High list.

Selection Criteria:
*The stocks must be making a new yearly (or almost yearly) high.

*They must be breaking out of a consolidation pattern, even if that pattern has only been in place for a few days. In general, the longer the length of consolidation, the more forceful the breakout and the following upward continuation.

*The stocks must be trading above their 65 day average volume.

How to Use:
Technically speaking, stocks that pass the above fitness test have the greatest chance of moving upward in the future, provided that the market continues to move upward as well. Select the ones that appeal to you the most and begin your research using your own fundamental and/or technical criteria.

Example:

GTE Chart 11-18-09

Breaking out to new highs on lower volume
Hot Lists:  Same as above.

Selection Criteria:  Same as above except the volume is below average.

How to Use:  These stocks have all of the features of those in the previous category but they’re trading on lower than normal volume. You’ll have to do a little digging to see why that is; sometimes it’s just because whatever good news is propelling a stock higher hasn’t yet reached the masses and other times it could be that investors and institutions aren’t all that interested in the company’s business model. In general, these stocks don’t hold up as well as the previous ones in market downturns.

Example:

VIMC Chart 11-19-09

Breaking out
Hot Lists:  Percent & Point Gainers, +VWAP.

Selection Criteria:
*Stocks that have broken out of consolidation patterns but are not making new yearly highs. These can include stocks that still face some significant resistance at higher price levels.

*Stocks must be trading at greater than normal volume.

How to Use:  After a period of consolidation, a stock that breaks out on heavier than normal volume is a good candidate for further upward movement. It’s important that the stock not be bouncing off a low as this could be short-covering resulting in a false breakout. It’s also important to note the next levels of resistance in determining whether or not you actually want to be in the stock and also for how long.

Example:

SMRT Chart 11-19-09

Breaking out on lower volume
Selection criteria and chart are the same as the preceding except that volume is less than normal. Use them the same as you would for stocks “Breaking out to new highs on lower volume.”

Sector & Commodity Highs
These lists are composed of exchange traded funds (ETFs) only.  They follow the same rules as for stocks given above.

Although ETFs don’t always mirror the action of their corresponding futures market, futures traders may wish to take note of the current action since sometimes ETFs can front-run the futures.

Summary
Today we’ve focused on the rich, bullish dishes on the Blue Plate Menu.  Tomorrow, we’ll focus on the palate-cleansing special situational stocks. 

*VWAP: Volume Weighted Average Price:  A rough measure of institutional interest (or disinterest).

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