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Characteristics of Superstocks

Characteristics of Superstocks

This is not an exhaustive list and nor will all superstocks meet said criteria below.  This post is designed as a guideline to help aid in your search for superstocks, both from a technical and fundamental perspective.

It is assumed the reader has an understanding of key concepts covered in well known trading books by authors such as William O’Neil, Mark Minervini, Stan Weinstein, Nicolas Darvas, Jesse Livermore, and Richard Wyckoff.  If you don’t, very little below will make sense!

Technicals

  • The stock has recently had a breakout from a large Phase 1 base preferably on volume many multiples the 30-day and/or 30-week average.

  • The stock should be above its 200-day simple moving average and/or 40-week simple moving average, meaning the stock is in a Phase 2 uptrend.

  • The relative strength line should be in a strong intermediate (4 weeks) and/or long-term (>4 weeks) uptrend, preferably near and/or hitting 52 week highs.  The stronger the relative strength line the better.

  • Side note, the best breakouts often coincide with a stock hitting a 52 week high on the relative strength line on the day of the breakout, or soon after.

  • Once the stock is in a Phase 2 uptrend, it’s common and wanted to see a sideways consolidation (base) being built.  My preferred average base duration of a superstock in a Phase 2 uptrend is between 3 - 20 weeks.  The base will often resemble one of the following chart patterns: Cup with Handle, Flag and/or High Tight Flag, Volatility Contraction Pattern, or a Flat Base (Darvas Box).

  • With all chart patterns above, it’s optimal to see price volatility lessening from left to right, volume declining in a similar manner, and structural higher lows forming.  Even better if the stock is respecting one or more key moving averages by bouncing off of it, instead of ‘chopping around’ multiple timeframes above and below - such stocks can be a wild beast to manage.

  • Once I see an optimal chart pattern forming which is displaying excellent relative strength and preferably respecting key moving averages, I’m on the lookout for the final piece of the jigsaw puzzle - a trigger bar.

  • A trigger bar is an extremely tight candlestick (and/or bar) accompanied by a dry up in relative volume and sits on one or more key moving averages.  It’s an indication selling (supply) has dried up.  On the daily timeframe the trigger bar volume is ideally <50% vs the 30-day average, and the same principle for the weekly timeframe.

  • An understanding of chart patterns and key moving averages can be used as a guide for where to be on the lookout for a trigger bar.  Trigger bars sitting on one or more key moving averages help me create better risk vs reward trades, aids as a reference tool for where to look for and time entries in repeatable chart patterns, and helps me to avoid buying extended stocks.  Below are several examples to be used as a reference:

  • 3 - 5 week High Tight Flag = 10-day exponential moving average.

  • 5 - 12 week Cup with Handle, Volatility Contraction Pattern, Flat Base (Darvas Box) = 10-day exponential moving average and 21-day exponential moving average.

  • 12 - 20 week Cup with Handle, Volatility Contraction Pattern, Flat Base (Darvas Box) = 10-day exponential moving average, 21-day exponential moving average, and 50-day simple moving average.

  • Side note, the 50-day simple moving average is closely aligned with the 10-week simple moving average, this is an area I’ll look for entries because it’s a location ‘large operators’ can step in to support superstocks.  They will often wait for pullbacks in superstocks to accumulate and/or add to positions, instead of chasing prices higher.

Fundamentals

  • William O’Neil wrote the growth stock bible with his How to Make Money in Stocks book.  I want the superstock to tick all the CAN SLIM criteria, but below are several other specific criteria I look for in superstocks:

  • Large reported increase in earnings and sales on a YoY basis which sparked a significant price advance with considerable volume.  Preferably this price advance is coming out of a Phase 1 base and/or early in a Phase 2 uptrend.

  • Easy YoY ‘comps’ in coming quarters.

  • From a business model standpoint this is what I look for: Something that costs a penny to produce, has a strong brand, sells for a buck, and is habit forming.  Also broken into the 5 parts below, SEBA-U:

  • Sticky: Habit forming for customers resulting in continued use and purchases.

  • Expensive: High operating/gross margins, preferably 10x, 50x or 100x the unit cost of production.

  • Brand: The management team and brand have a fantastic reputation.

  • Air: Company products are easily produced, marketed and sold at low relative cost to what they are eventually sold for.

  • Unique: Has a big competitive ‘moat’ (Buffett terminology) around the product that competitors cannot easily create or copy themselves.

  • To summarise the SEBA-U example above, imagine selling air (free to produce), that only you could sell (competitive moat), at high margins (big profits), and customers formed habits/required often your product so you can have repeat sales.

Bonuses

  • The stock is in a Phase 2 uptrend, but has not built more than 2 - 3 continuation bases.  Late stage 4th and 5th bases in Phase 2 uptrends are more failure prone.

  • There is recent insider buying of the stock.

  • The stock has a low float.

  • The stock is unknown and under-owned.

  • The stock has an Average Daily Range Percentage (ADR%) over the prior 20 - 30 days of >3%.

  • The stock is in an industry group showing relative strength and early in a Phase 2 uptrend.

  • Many related stocks in the industry group are also showing relative strength and early in a Phase 2 uptrend.

  • The stock is rarely spoken about on mainstream media, social media and bulletin boards.

Please note that this blog post is for educational and information purposes only. It is not financial advice of any kind.