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Scanning Daily Charts for Pattern Setups

A lot of people are asking how I go about scanning at night... What makes one stock look more attractive than another... What are the indexes I look at... What scanning tools do I use, etc. So tonight I'm just going to do some of it with you. I'm thinking it will take about 500 times longer to scan tonight doing this lol but I will just walk through some charts etc.

One of the first things I do before I start scanning is look at the S&Ps, Nasdaq, Dow etc. So.. tonight... you all need to have your charting programs open. If you just have one monitor.. just put up a daily chart. Otherwise, I have a minder, daily, weekly, level II and a few intraday charts on my screen. All of the charts are linked to the level II so I can just click on a symbol in the minder and drag it to the level II and all my charts will change with it.

Let's first pull up the Nasdaq. I use at the Nasdaq Composite: $COMPX. The reason for looking at the market indexes first is to get a general feel of what to expect the next day. Today is a day where I am thinking end of day scanning may be rather dull in general since we are at the bottom of a market move. I showed you guys a chart earlier of the monthly Nasdaq in which it looked very topsy and where we were at basically the 20 month moving average with a lot of downside potential. That only shows what could happen in the longer term though. For more immediate needs a daily and weekly chart tend to suffice. What you can see on the weekly Nasdaq is we are in the second main down swing since the beginning of the year with a peak in the 4000 area in July.

Important to note is that the pullback was steeper than the rally into that peak. The move lower over the last few weeks is taking less time than the move higher off these levels on the way up. Often this means that the selling pressure is the most powerful and most likely to continue and it is why on our daily picks we have had such a bearish outlook reflected in the large number of shorts given based on daily setups. Now, however, we have had what is typically a reversal day with the large gap down and buying throughout the day.

If you look back at other such days with large gaps down and buying pressure intraday, you will see they they typically lead to a few more updays, albeit not as strong of intraday trend days as the day of the gap. Such examples are 4/27/00 and 4/5/00.

What is interesting is that we are seeing a base at highs over the past few days, making this 3750 area rather strong, and we have a great deal of moving average and price resistance in addition to that. The 10,20,40,50,100, and even 200 day mas are just overhead and since we have a base here following a move lower... I am thinking an upward move will have a hard time.. meaning sloppy moves intraday.

I think we may be able to break the day's highs briefly.. pulling into the 10 and 20 day moving averages
08/03/00 16:51:55 <Toni> but really.. daily prospects in the Nasdaq aren't looking good if just looking at the Nasdaq Composite. I just won't be putting much trust in follow through potential... This would make me consider only trading partial lots if I find anything I like on my daily charts of individual charts.

I will want to look for sectors which have more predictable patterns and would probably gravitate towards intraday setups rather than daily ones. I usually wait 'til I have finished scanning to come to a more definite conclusion, but usually my initial reactions and gut feeling are the ones I end up sticking to.

Next let's pull up a chart of the S&P 500: $INX. It's looking a lot like the Nasdaq... on the weekly it hasn't yet come into the trend line support and on the daily it too pulled down rather steeply before becoming somewhat range bound here over the last few days, leaving some potential for more downside in the next few weeks and also basing here at the 200 day moving average.

Looking from day to day though.. it too looks like tomorrow may have a bit more upside.  It's also into a lot of moving average resistance which will usually mean sloppy action on the daily. When we get a convergence of so many moving averages, the reason is that it is forming a triangle on the monthly chart, so we are seeing a lot of convergence which is going to have to break here soon in the next few months.

The Dow ($INDU) is also fairly similar on the monthly as it is also forming a triangle with ma support at lows. The Dow still has that 200 a resistance overhead and is still range bound. 

So.. the general conclusion here is that the market indexes are a point of do or die.The s&ps and dow can't get in much tighter of a range and the Nasdaq is also at a crucial point with it's support under the years lows. What you can gain from this is that daily patterns are going to have a lot higher risk. It's not really a great time for investing. So.. our main concern now would be to look for charts on the daily that could give large moves intraday. The past few weeks these have been predominately short.

One of the next things I do after checking out the markets is to look at some of the major indexes. I usually scan through most of them but we will just cover a few key stocks in them and the index as a whole. If you have Real Tick you can right click on a market minder and select Load Symbols. The first one is the Airline Index: $XAL.X

So. pull that up on your charts. Now here is an index that as a whole looks kind of interesting... nice uptrend, pulled back fairly calmly to the 50 day moving average. You might start to think.. "Hey.. core buy setup" and.. it might be, but you also have to look at it in another light... On the weekly the moves are slowing in strength, meaning it could easily pull into a base or have the next high a lower high. This means I would not expect that it could easily break to another year's high. It might, but it will have a hard time doing so. It's also holding this 50 ma area here quite well, not breaking strongly off it, but if there is a strong stock in the sector we could get a good one or two day move. If nothing else we may run across a hell's triangle setup. 

It's worth taking a closer look at so I will start scanning through the stocks in that sector, paying closest attention to the bigger names. One thing you'll see as you do this,which I was already familiar with but you may not have been, is that the airlines are really kind of going their own ways lately and it won't take much scanning to realize the index as a whole does not compare well to many of the individual stocks. 

Stocks in the index that might catch your attention are ones like LUV.

Nice trend, holding up very well... might see some continued strength... but then you need to look at how the stock trades. Look at how it acts from day to day. Look at it's price and it's average intraday range. In this case you'll see that LUV get a lot of overlap from day to day and intraday it's range isn't very wide. For how it trades it was a better setup 4 days ago off the 10 ma than it is now.

So what about CAL... That may also have caught your attention. It's another strong one, pulling in very gently. The 10 and 20 day ma coming together and the weekly chart looks nice.

It has also based here a bit and something I would think when seeing this is it could go either way.  I would look mainly long, but know that a break down could be fast so I would want to keep a close eye on it. So.. it looks ok, not exceptional, but if it gaps up it could bring in strong buying.  A gap up would be great to see. Just look back at 7/5/00, 5/23/00, 6/2/00... When the stock gaps it can get large moves in just a day or so.

Now, what's it look like intraday? Unfortunately that's not as pretty of a picture. A $50 stock with a $1 range today. Granted, on days it runs you will see at least double, but look at what it looks like... rather thin, more like larger block trading to get its ave. daily volume than people like us. So, it may be worth watching, but not something high on my priority list.

Onto the next sector.... Next let's pull up the Biotechs: $BTK.X Ok... everyone have the biotechs up? Someone tell me what they see. What does the index look like to you? What do you make of it?

<kevin> downtrend, rally into resistance.
<Toni> How strong a rally? You think it's over?
<kevin> no, but I would bet it slows down
<Toni> when do you think it will be?
<ccap> bouncing off 20ma on weekly
<kevin> within the next 2-3 days
<Gig> I'm guessing it will make it to the last low on the daily
<Toni> Ok, and why do you think it will end then? What price area would you expect it to stall at?
<kevin> 20ma on daily
<Gig> about 678
<kevin> 675ish
<Gig> The 20ma should provide resistance also
<kevin> probably lower when it hits
<Toni> Ok, now look at the weekly what is noticeable about that other than the 20 ma support?
<Gig> It's already broken low set in July
<kevin> uptrending
<bbcc> lower high
<_stktrdr> 10 week over head
<kevin> pullback and then strong day off the 20ma
<kevin> forming a hammer
<Gig> It did not take out its old high
<Toni> Ok.. now look at the highs.. anything interesting?
<local> lower highs and lows last 3 weeks
<Toni> You're all making good observations. I'm thinking about the last high in July, the top one. Then look at the weekly: Feb./Mar.
<Gig> It did not take out that last high
<_stktrdr> long upper tail
<local> again lower high
<Toni> No.. but it did come close enough to call it a double top and now we have a lot of support, not only from the 20 ma on the weekly, but also the 50 and 100 on the daily... and price support. The support in April has not yet hit, but it would not be a surprise to see just what Gig said. This means that with all these area of support vs. resistance in the biotechs, I wouldn't be looking for a really strong move higher but at the same time, it's not out of possibility because often a third try at the high on the weekly will break and biotechs aren't pulling down as strongly as the nasdaq as a whole. 

It seems to be generally a stronger sector in that market so when I'm looking for the nas to pull up, this is one I will be looking in first for strength. Also, since we are looking for the possibility of a bit more upward action in the nas on the daily... biotechs might be worth looking at intraday tomorrow if the nas holds up. Now what you have to worry about though, and what could be the wrench thrown in your magical trading machine, is that resistance area we've got going, because face it.. another 40 points and it's gonna have to start fighting if it wants to move higher. With it hugging that 50 ma still... and not quite pulled down to the stronger price support on the weekly near the 200 ma on the daily we could still see another wave down in the next week. So, my conclusion here isn't much different than the market in general: the daily doesn't favor a large move in the next few days one way or the other. It's gonna make me work. I like the upside potential but it's not worth the risk as a swing for me. 

So I want to look now at the individual charts in the sector. As you saw with the airline index, sometimes the index chart for the sector is skewed compared to the individual stocks. To get the big picture I will scan all the individual stocks in the sector. This only takes a minute or so if you ahve a good inet connection.  The faster the connection and the more experience you have weeding through charts, the less time it will take. 

Ok, done scanning them and guess what: a few stocks are skewed... Many are looking like they want to break lower... holding snugly (or desperately) to moving average support after a move lower, while others, the darlings of the biotechs, have moved like crazy. One darling is GENZ....

Check out the action here on the daily, basing at highs, tested a new high today. The weekly trend is well under way and it looks like it wants to go to the moon and hey.. I bet this gets more upside before it's done, but.... is it too risky to trade?
<Gig> Volume not impressive though today toni
<Toni> No, it wasn't. Also, you need to take it apart. Look at it from day to day and intraday. It's sloppy as all get out: up... down... up... down... up... down... makes me dizzy... This makes it not as attractive to trade.

Let's see another.. CHIR was on many charts today. It was a "gainer"

 but, you know what, now it closed the gap from late July and is hitting the 20ma. Does this make it a good short? It has had several days higher lows and higher highs. It's at resistance. There is a lot of resistance on the weekly. This includes price resistance from March and April and late June and 5 ma resistance on the weekly. What do you think? Would you short it? Why or why not as a swing?
<Gig> No, I would not short it
<kitkat> ... the higher highs and higher lows make me uncomfortable shorting it
<Toni> they can be very jumpy
<Gig> The 200ma and 50ma are still upsloping
<Toni> but why?
<kitkat> with a little news, this baby can get some serious upward momo
<Toni> The core swingtrade short setup is a downtrend with a pull up of 3-5 day of higher highs and higher lows into resistance so why not short?
<kevin> filled in the gap ?
<local> stock is placed between its 50 and 20 ma. too much risk to play either direction
<Toni> VSTR we shorted a few weeks ago.. 50 and 200 were still sloping up. Most hell's triangles have that.
<Toni> Kevin is getting close to what would be my main reason... Gap.. what is a gap? What creates a gap?
<humbletrader> panic
<chipper> good/bad news
<Toni> Strength in this case.  Period. It moved up too far too fast... 3 days off 200 ma support... wooooshhhh, like someone stick a branding iron to its butt. You need to avoid shorting something that moved up big in a downtrend, that had a rapid 3 day pull up. Here is why: See CHIR in June/early July... fast run up, just like the last move down was strong in CHIR in mid-July. Then came the pullback that was sharper than it typically has. This is like the current rally, but this is even more so, and look.. that sharp pull back kept pulling back.. Likewise, this pull up could keep pulling up in the next few weeks. Make sense? Gradual is better.
<chipper> So CHIR would rise to ~55 to fill in the recent gap?
<Toni> It has basically filled the gap already from the 24th to the 25th of july. That gap filled today.

Here's another visual. Turn PWER upside down. Notice it was in an uptrend, then on July 21 and 24 there was a fast drop. On the 24th I put it on my watch list that night for a hell's triangle in a few days. My reason was that the pullback was too steep. It was as simple as that. Look at the pullback in June to early July, before the last main run. It took some time. It wasn't steep. The one in July was steep, like a cliff. That makes a core buy setup too high of risk.
This chir move is basically the opposite, too steep a run. Not worth it. So, you get my picture I hope? Make sense?
<humbletrader> yes
<ccap> yah
<Toni> =) good

Now I go through all the main sectors like that, flipping trough them, trying to find something that stands out. So far I haven't found anything tonight lol, but,as we saw with the market index charts, that was pretty much expected. I will have fun writing the letter tonight =) Next, I scan the NASDAQ 100 and S&P100. I do the 500 if I have time. Also I rely on Brandon. He uses a few scanning programs like TC2000 to find setups in and I often look through a list of stocks from a month or a few weeks ago that were gainers or losers, just popular symbols, things people have been looking at a lot lately, and I go through them all.. looking for something that strikes me. 

I'll do this again on a day when I think we'll find more to look at that may actually be worth taking based on the daily charts, but hopefully you picked up a few things tonight to think about. Told you I'd take up to 2 hours today.

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