Anyone with just the smallest amount of stock trading experience knows it is impossible to predict exactly which stock out of an already narrowed-down watchlist will be the one that blasts off during the next market rally.
However, there are two basic, yet extremely effective strategies to stack the odds of finding the biggest-gaining stocks in your favor. Continue reading to learn more, including an example of an actual Wagner Daily stock trade that fits the criteria…
1) Relative Strength – A Rock Solid Basis
Relative strength is the foundation of all our stock scanning, and is also the core of the strategy discussed in my ETF trading book.
Our version of Relative Strength (RS), not to be confused with the Relative Strength Index (RSI), ranks stocks that have outperformed 80% of all stocks in the market over a 6 or 12 month period.
Once a basic watchlist with high relative strength stocks has been created, the next step is to narrow down the list by searching for the best weekly and monthly (long-term) stock chart patterns. You should also look for bullish volume patterns on those same charts (high accumulation with little distribution).
After your list of the top swing trade candidates has been defined, the last step is to rank the list by industry group relative strength, quarterly earnings growth percentage (IBD is a great resource for this, as well as group RS), and quality of chart pattern by using multiple time frame analysis.
2) Multiple Time Frame Analysis – Seeing The “Big Picture”
Multiple time frame analysis is a simple, but often overlooked concept because many new traders focus on price patterns over just a 3-4 week period on a typical daily chart interval.
But one of the key tenets of technical analysis is that the longer the base of support, the more powerful the eventual rally higher will be. As such, traders who ignore the longer-term weekly and monthly charts usually miss one of the most important factors of a bullish chart pattern.
With that in mind, your scanning process should be focused on stocks that are either breaking out from a longer-term base OR have recently broken out from such a base and are consolidating for the first time.
Generally speaking, the earlier you can identify a low-risk entry point in a trend, the better your chance of finding an explosive mover to hold for an super-sized gain, especially when price action is confirmed by volume, industry group relative strength, and strong quarterly earnings growth.
Omega Protein ($OME) – Walking the Talk
With a share price gain of approx. 30% within just the past six weeks, Omega Protein ($OME) is a solid example of a stock that is early in its trend and is breaking out on multiple time frames.
With a relative strength rating of well over 90 at the time of our entry, $OME was already showing a ton of relative strength by setting higher lows all summer while the broad market sold off.
$OME originally caught our attention on October 19, when it cleared the highs of a the current trading range on heavier than average volume.
We then gave details of the buy setup (trigger, stop, and target prices) to subscribers of our swing trading newsletter the following day.
After buying on a slight pullback on October 20, the breakout initially failed to hold and the price slid down to key support of its 50-day moving average.
But knowing that the first breakout attempt of a stock is not always successful, we held firm with our stop in place (“set it and forget it” just below the 50-day MA).
After a week or so of choppy price action, $OME gapped sharply higher on big volume, in response to earnings on November 5 (remember the importance of strong earnings growth), then followed through the next day with another strong advance on volume that was about 300% greater than average.
The daily chart below details the action:
The longer-term weekly chart below shows a strong breakout from a tight trading range above the rising 10-week moving average (blue line).
The strong price and volume action on the daily chart was confirmed by the same on the weekly chart, with last week’s wide candle on big volume:
Depending on your screen resolution, a weekly chart may have included enough price action to show the summer breakout above the highs of 2011 and 2014 at $16, which by itself is a very positive sign.
However, using multiple time frame analysis to assess the monthly chart below is what truly separates the chart of $OME from others, as we now see the recent breakout to a new 52-week high was also a breakout to a fresh all-time high, as well as a breakout from a massive 17-year long consolidation:
Riding an unrealized gain of roughly 30% since our $18.85 entry into $OME, the model portfolio of the Wagner Daily newsletter is benefiting nicely from this stock with no overhead resistance.
Nevertheless, we never forget that carefully raising the protective stop along the way is the key to maximizing the gain, while minimizing the risk of giving back the profit.
We’d love to hear your thoughts on this article, so please drop us a line below.
3 comments on “2 Simple Techniques To Find The Next Explosive Stock On Your Watchlist”
I really agree with how you use volume and volatility. The volatility and volume dry up before a break are one of my go-to setups and scans.
Could you give your thoughts post trade on using your methodology on ome. The stock is currently at 17, could you share whether are you or are you not holding the position, because this stock appears as one of the perfect screens you made, base on the blog post above. If so, why. If not, could you share why and where you exited the position. Thanks
Hi, sorry for the late response. There is nothing wrong with buying OME from 2/10 to 2/29, but after the ugly reversal on 3/3 one has to sell at least some of the position if not all. On 3/7, the low of 3/3 is broken, so more reason to sell if one hasn’t already. No reason to be long below the 50-day MA. I hope this helps, let me know if you have any other questions. Thanks.