Here’s how I use the trading forum to find great stocks. Check out my trade on JD.com (JD). (July 09, 2019)SQ Service Atlassia SQ
I am doing this Chart of the Day video a little different than I do a lot of them and here’s why: I want to just walk you through a trade that I put on today on Square ( NYSE: SQ ) and I will tell you how I did it the Stock Market Mentor way.
You can see the trade here already; it’s an obvious breakout here on very, very high volume. So here’s the deal: How did I come across this stock? I have certain parameters that I look for and this meets virtually none of them. The way I looked at this stock today was this: At precisely 9:34 in the morning one of our members posted, SQ ( NYSE: SQ ) up nicely, in the forum. Right about the same time somebody else posted, SQ ( NYSE: SQ ), off to a nice start. About 20-minutes later somebody mentioned, Cramer just mentioned SQ ( NYSE: SQ ), lots of short covering.
The point is, I saw this stock mentioned in the forum, I wasn’t even looking at it. Here’s the thing and this is really important, so big deal, I saw a stock mentioned in the forum and I made a trade off of it. That’s not what I am talking about, that’s just a part of the deal. The trading forum that we have at Stock Market Mentor has active traders in it every day. Some that aren’t so active, they’re just there and they have longer-term positions, etcetera, etcetera, but a lot of the traders who are pretty new. They are really new traders, they don’t really know much about trading but they are there, they are trying to learn.
The point is, there are a lot of stocks that are mentioned in the forum on a day-to-day basis. I read every post and on some of the posts I will see somebody say, “Such and such stock is moving,” and I will look at it and it’s down 6-days in a row and it has just rebounded half of a percent and I think, Okay, I get what’s going on, this trader has a position in the stock, they are losing money and it is kind of like wishful thinking. Okay, no thank you.
My knowledge of trading helps me sift through the chaff and get to the wheat. And so when I looked at Square ( NYSE: SQ ) I immediately looked at the chart and thought, Okay, this is worth looking at so this is what I did: I immediately went to my trusty MarketSmith; because I look at this stuff all the time. I love MarketSmith but I want to tell you exactly what I was looking for because this is basically just a swing trade for me. Again, it doesn’t meet a lot of my parameters for what I like to do to take position trades.
The first thing I looked at was this right here, boom, relative strength rating, 61; I like mine about 90, maybe 85 but really I want 90. So 61, this is why it wouldn’t even meet my criteria. This is a daily chart and you can see the break out here, I see it better on my TC2000. So I look at this RS, okay, duly noted. Now I look at Earnings and I look at Sales. These are quarterly and they compare quarterly earnings versus the same quarter the prior year. I see on the earnings front, that’s the top line, the quarter ended June 30th of this last year, 86 percent versus the same quarter the prior year.
Then the next quarter, 86 percent, this is like accelerating earnings growth, and then 75 percent and then 83 percent. The difference between 86 percent and 75 percent, 75 percent and 83, this doesn’t get my attention. Guys, this is monster performance on earnings. Sales, this is the stuff that I really pay most attention to or at least I give a lot more credence than earnings because revenues, sales, you can’t really monkey around with revenues. Sales are sales. Earnings, you can have, like let’s say the company has a big huge expense in building something out, a big huge capital expenditure that takes a lot of their revenues and does not allow them to go to the bottom line.
In other words, sales numbers are great but you lost money on a particular quarter.
So if we are just looking at the earnings numbers we could see a really nasty quarter in here and be scared away from the stock.
But what has really happened is, the company has just spent a lot of money, Amazon ( NASDAQ: AMZN ) did this for decades, they just took a lot of money and rather than put it down into earnings they put it back into the company. So that’s why I look at earnings, I like to see this and if I see more than one quarter of kind of a negative number here, like let’s say this plus 75 was minus 75. If I see one quarter like that but the actual sales are doing really well I will look at that and kind of try to figure out what happened, and then my conclusion will be, Huh, okay well that’s worth noting. If it happens two quarters in a row then I have a problem with that but you can’t make that same comparison with revenues, with sales. You have got to see good strong sales. So from a fundamental standpoint, this is all good.
Now, I look at a couple of other things on this. If we go to the weekly chart I want to see what their debt is but, frankly, for the most part, I don’t really care about that because money is cheap, but I look at return on equity. I want to see that the company is making good use of their numbers. By the way, I have been doing this video for 6 -minutes, it takes me about a minute to do everything that I am talking to you about, I just want to walk you through this trade. So I see it in the forum, I look at this, I note the relative strength, we’ll get back to that in a second, I see their earnings per share rating; again for trend trades, for growth stocks, which, I have a Growth Stock List that we track, which is doing exceedingly well, it has been for months. I look at EPS rating and this is again, I want to see it above 85 percent, 90 percent is better. Here, I don’t really care because I have already gone through the quarterly numbers and they are fine. P/E, it would be impossible for me to care less about price-earnings ratio. That’s a ratio that losers look at. You are buying cheap stocks; they are cheap for a reason.
So I have gone through all this and the one thing kind of sticks in my craw, again, is this, a relative strength rating of 61. That means that this is only stronger than 61 percent of the market. I want to be in stocks that are stronger than, like 90 percent of the market. Okay, ServiceNow ( NYSE: NOW ), 97 percent. TEAM ( NASDAQ: TEAM ), 98 percent. And so this whole thing on Square ( NYSE: SQ ), 61, is not really making me feel real good.
However, here’s the thing, this is what allowed me to get past it right away, this was the last high here. If we stretch this over we can see that relative strength rating broke to a new high at the same time as the stock broke to a new high. And so suddenly this is how I am looking at relative strength and this is how I am looking at this chart. I am seeing a stock that has been, yes I see this cup pattern that IBD has but I am looking even further back. I see this, I see a consolidation here that has gone back clear into last year. Has it been a wide consolidation? Sure, absolutely, but it’s been a consolidation nonetheless. And so I see a lot potential for this stock to break out to the upside, which pushes this RS rating from 61 up to 65 to 70, etcetera, etcetera.
So I looked at this and I see the volatility squeeze. I see the stock squeezing out of these Bollinger Bands, which I always track, about 8 percent, which aren’t the narrowest but they are sure narrower than most of the time. I see the high volume; I am comfortable with the fundamentals, I take this trade and this is what I am looking at now. I am looking at $80.00 as a time to really look for some serious resistance. If I am looking at this on the daily chart, 5-minute chart, I am impressed that the stock ran up for 2 hours or so and then just pulled back about $1.00 and then rallied back up. So this is a trade that I want to stay with because a stock that only pulls back $1.00, that’s moved like it has and then starts moving up again, I am doing this video at 5-minutes to 1:00 EST, this shows me that this is a strong stock that is worth hanging onto. And it all started with a few posts in the forum.
So I want you to be thinking about this. And whether you have my process or any other process as long as it works for you, you want to have a plan, a checklist. But you can go through automatically and very quickly when you see a stock that you think is going to work. It is the only thing that will keep you on track. If you don’t have a plan, if you don’t have an approach that works for you then any stock is the right stock as long as it’s moving. You only find out later that maybe that stock that was right at the moment turns out to be wrong for your account.
Whether you are a member of Stock Market Mentor or you are just looking at the news flow, you’re watching CNBC, whatever the case may be, if you see a stock that you have not been following you need to say, Okay, let me look at that stock. Let me run through my list, let me run through my numbers, go through all this stuff like I do and then you either make the trade or you pass on the trade. And by the way, just to wrap this up I will tell you this, again, it kind of started out as a swing trade for me, if this falls today I am talking about below the intraday low of 77.29, here, right here, if this falls below 77.29 here’s what I will do: I will take half of my trade off the table and I will raise my stop on the remaining to break even. This allows me to be in a stock at basically no risk at all with a slight profit and then the only question that remains is, will I only make a slight profit or will this stock break out and really give me a real solid reward?