That would be nice wouldn’t it – to find the next big winner in the stock market. Just take a look at these beauties on the US market (from 2004):
What do they all have in common? Firstly, they were all momentum stocks. And secondly, they all made massive gains in a short space of time. These are:
TZOO: 100% return in 6 weeks, 2004
NTRI: 400% return, May 2005 – Jan 2006
HANS: 1000% return, June 2004 – May 2006 (split adjusted)
TIE: 400% return, July 2005 – May 2006 (split adjusted)
Before we continue, let me introduce myself. My name is Alex Chambers. I’m a UK medical doctor who has an interest in the stock market.
So how do you find these stocks in a sea of many?
Of course, there’s no magical answer. Don’t believe anyone who claims there is (especially if they are selling you an expensive trading system or offering a “hot tip”). However, there are some tell tale signs that these type of momentum stocks give off to alert you to their presence, and I use these to scan the market:
1) They are forming new all-time highs
2) They lie dormant for a while, then suddenly “wake up” – ie. they break out of a prior trading range. This can be anything from a year or two to many.
3) They then experience rapid price rises with a marked increase in volume (the concurrent increase in volume with price is very important – it donates the stock is being accumulated)
4) They are leaders of a new general market uptrend
5) They are generally priced greater than $10
This is in essence the system that Nicolas Darvas invented and used in the 1950s to make his $2million fortune – trading on week old data. Darvas detailed his exploits and how he created his system in his classic 1963 text, “How I Made $2,000,000 in the Stock Market”. It’s a great read and I highly recommended it. Many investors regard the text as a classic. In it he provides an honest and open look at his experience from his naive start to his eventual success. He lays out, in great detail, exactly what he did and how foolish some of his actions were. Then he explains how he came to find success by focusing on the price and volume action of stocks.