Warning: Mostly for beginners and those asking for specific picks. Most of the discussion relates to TC2007. The advanced traders might want to skip it.
The earlier discussion on this is here.
How to narrow the number of breakouts- Part 1
Investor Business Daily CANSLIM method
There are many other ways of doing this same thing. If you compare the result of the Relative Strength vs S&P scan in TC2007 to Investors Business Daily Relative Strength or RPS you will find it does not exactly match. The exact IBD formula according to them is proprietary, but in some of the early books there are lot of hints that it is a weighted average of 1/2/3/4 quarters with different weightage. Now here is a formula to get similar RPS ranking.
IBD style RPS scan:
0.4 * (C * 100 / C65) + 0.2 * (C * 100 / C130) + 0.2 * (C * 100 / C195) + 0.2 * (C * 100 / C260)
Here is what you will get with a top 2% sort. (MWRK, SWHC, IIP, AKAM, TAR, SVVS, RICK)
The Investors Business Daily CANSLIM methodology is basically a combination of Earning momentum and Price momentum at a conceptual level. There are other element to it like market direction filter but why it works is basically it buys stocks with earning and price momentum. If you want to use it you can use the IBD EPS ranking feature to reduce your universe of stocks further.
There is also a way to do a IBD kind earning+relative strength momentum scan in TC2007. ( Note: The earning data in TC2007 has certain deficiencies and it is not to best of my knowledge updated daily. There is a batch update). Here is a scan idea which you can experiment with.
Set up a Easyscan with following conditions:
1. Watchlist: All stocks
2. EPS percent change 4 th quarter back value> 25%
3. EPS percent change 3 rd quarter back value> 25%
4. EPS percent change 2 nd quarter back value>25%
5. EPS percent change latest quarter value>25%
6. IBD style RPS scan rank ( 0.4 * (C * 100 / C65) + 0.2 * (C * 100 / C130) + 0.2 * (C * 100 / C195) + 0.2 * (C * 100 / C260))>80
7. Long scan ( V >= (2 * AVGV30.1) AND C >= (C1 + .25) AND AVGC20 * AVGV20 >= 2500 )= true
Here is what you will get with this scan. (PZZA, CACB, GRC, AB, NPK). Everyone loves pizza!
The EPS ranking you see in IBD is also a weighted average of past earning growth. With some sleuthing (hint use Google) you can find out how it is calculated. Alternatively use the IBD 200 list which appears on I think Thursday. So in simple term when you see large number of breakout, narrow them down by a fundamental criteria like EPS rating. So you might decide to only look at IBD EPS rank above 80 out of the breakout you get.
Now if you believe in the IBD logic, you can take this entire approach further. Build your own earning database . Once you have that, you may not wait for a breakout, you might be able to anticipate them. You will have less than 100 stocks to watch. You will know in advance which stocks are going to be in IBD 100 list before the newspaper hits stand. Imagine tomorrows newspaper delivered today or days in advance. What else do you want with it-free fries or pizza?
In part 3 we will see another more powerful method to narrow your breakout list to just a handful. You may have to wait for it till next week as I am going to enjoy the beautiful New Jersey weather . We are having a barbecue picnic at the Mercer Park. Join in.