Yesterday, we wrote a post about scanning for new lows, putting our own spin on a strategy called "Wall Street's only free lunch."
I was joking with JC that it felt a bit uncomfortable to search through such a weak list of stocks. After all, we’re used to scanning for strength.
But the scan was a fun exercise, and we found some weakness we want to be buying in secular leaders.
The universe wasn’t exactly full of strong stocks, as we were scanning for new 52-week lows. But that’s OK; we have plenty others for that.
In this post, we’re going to walk through another scan we did internally this week. Unlike the "free lunch," this one is more in line with our top-down approach of finding the strongest stocks in the strongest groups.
While we're still scanning for new lows, we’re doing so on a much shorter time frame, and we're adding additional filters to ensure all the stocks on our list are leaders.
We like to tailor our scan parameters to the market environment. As such, we’re always changing it up to adapt to the prevailing conditions.
Let’s dive in and walk through our thought process for this scan. Then we’ll take a look at some names and outline the best setups that we could find.
The idea of this scan was to find strong stocks that pulled back during December but remained above their first-half highs. We’re looking for stocks that showed relative strength and resilience during the recent volatility and recovered quickly from it.
Here are the parameters we used:
The stock made fresh one-month lows during the trailing two weeks.
This script limits the universe to stocks that pulled back and made tradable lows into the middle of December.
One-month relative change is positive.
This means the names on this list rebounded strong enough off their recent lows to outperform the market over the trailing month. In other words, buyers bought the dips aggressively in these stocks.
Price is above the 2021 first-half highs.
This one’s easy: The strongest stocks in the market are above their Q1 and Q2 highs. These are the kinds of names we want to buy weakness in.
Momentum is in a bullish regime.
This tells us that the daily RSI-14 was more recently overbought than oversold. Therefore, these names probably didn’t get oversold despite hitting new monthly lows recently. This is what we tend to see when stocks pull back within the context of strong uptrends.
Here are the top 60 names that fit the above criteria, sorted by drawdown from 52-week highs.
Notice how many of these names are already back at 52-week highs despite recently making new one-month lows. In fact, this is the case for each of the setups we’re about to discuss.
Let’s dive in and look at some of our favorites.
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