How to find explosive trends near their beginning

Trends start from low point and some of the most explosive trends happen when a beaten down stock established a bottom. How can you convert this market observation in to a setup and daily method?

OSTK is an example of kind of things we are talking about. It went down from 25 to around 5 in a year or so. Once it established a bottom it went up 700% or so.

These kind of moves are another phenomenon in market besides the momentum phenomenon.

Companies get beaten down to extreme level and investors give up on them. At some stage they surprise the market with new earnings power and then an explosive trend happens.

Obviously all these stocks will show up in your Momentum burst scan on day of breakouts. So one way to find them is using that scan.

But if we want to build large position and hold for longer term position trade then we must have conviction .

To develop conviction we must research or have sufficient understanding of the business to understand whether the turnaround is for real and if it is sustainable.

Once a low point in downtrend is established a new trend starts .

In order to start tracking these kind of stocks in downtrend and researching them before they breakout, we can actively scan for them.

If we scan for stocks down 40% plus from their 52 week high we will get beaten down stocks. Adding a liquidity filter of say at least 50000 average volume  will further narrow that universe.

However if you just run the scan like this you will get lots of small caps stocks with little chance of turnaround.

Adding a filter of Sales 1year>300 million plus  will narrow the list considerably to only stocks with actual sales. Adding a billion dollar plus sales filter will give you very narrowly focused list.

Just because a stock is on this scan does not make it a buy candidate. This list is for research purpose to find out likely catalyst that will lead to sustained turnaround. That is information intensive task. But you have months or years to research these stocks as many will take that much time to bottom.

The most common catalysts for turnaround will be:

• earnings surprise
• activist investor building position (this is becoming very powerful catalyst and represent structural change in the market. Now companies face intense pressure to turnaround and that is why you see so many V recoveries. They force management to restructure quickly and put intense pressure to cut costs and buy back shares and improve profits. YHOO and WBMD are two recent examples of this. As this strategy is working well it is becoming more popular among hedge funds.)
• new management
• in commodities often bottom happens without earnings improvement as market anticipates earnings.
• Govt policy change . Solar sector is example of this.

This kind of approach is more suitable for speculators with lot of patience and who has skills to research these ideas. But the rewards are big if just one or two ideas work out. When they explode they can make 500% plus moves. Look at the Stockbee 50 list published on the site and study where they started their trends from.

This method is for thinking speculator with lot of time on their hand.