Usual Suspects - Examples

This stock showed up on my scan when it was trading at 79.80 and was on pace to trade higher than average volume. What I liked about this setup was that the stock has consolidated for four weeks and was finally breaking out through resistance. This is the first day of the move.

Over the next two days, the stock went up to 87.50. If I wasn’t running an intraday scan, I would have never been able to find the stock on the first day of its move.

This case study shows why this scan is so effective. The only way I could be one of the lucky ones to buy this stock was to discover it on the first day it made its move. Otherwise, I could find it by running an overnight scan. This would enable me to enter the stock when the smart traders entered it. The exit would normally be done on the third or fourth day. The above chart shows my three-day theory to perfection as the ones who bought the stock on the third day are now holding the bag.

One of the problems of waiting for day-two before entering the stock, (if you did not discover it on day-one), is that it is almost impossible to find an acceptable support level to place a stop loss. If we look at the above example again, the support level is the actual breakout point. However, this stock closed about three points higher than the breakout price level. If I were to buy the stock the next day at 83, I would need to have a price target of at least 92.75 to get a 3.00 reward/risk ratio.

The Usual Suspects Scan can also be used to find stocks that are making a bottom. This stock showed up on my scan when it was trading at 26.75 and was on pace to trade higher than average volume. What I liked about this setup was that the stock had come down in price for a while and was very active. This showed me that there was interest in the stock. As you can see, the low of the previous day was not taken out. The stock found great interest and traded up to 29.75.

Stock trades up to 37 over the next eight trading days. The big volume day was a good signal for a potential bottom for the stock. The 38% return in eight trading days was a huge bonus. The fact that the price pullbacks took place on low relative volume could have kept you in the trade through day-eight. However, if you only caught the price movement in day one, you could have still made 11% that day.

This case study is one of my favorites, because the setup is not as obvious as a breakout setup; yet, it provides you with unique opportunity to make extraordinary gains.

This scan is extremely powerful, but it has many flaws that you must be aware of. The first one is that you will get many results that you would have to filter through on a daily basis. Many of the results will not be high probability setups. I have added additional filters to this scan, which I will cover later on. However, I want to feature some of the common mistakes you could potentially make.

One of the most common errors that one can make is to enter a stock that has already started its swing. This stock had bottomed at 10.88 and started to trade up. However, the volume criteria was not met on the first day of the move. The stock did meet the volume criteria on the second day, but was already up 18% from the previous day. I would have not entered a trade there simply because it wouldn’t have answered to an acceptable reward/risk ratio. If you chose to take this trade you would have gotten away with it as the stock traded up to 15.25. However, many traders would make the mistake of entering the stock on the third day because of the volume spike. They would anticipate that the stock would test the highs at 16.50.

As you can see, this stock went down to 12.00 over the next two weeks. If you bought the stock on the volume spike day, you would have probably lost money. It is important to understand that a volume spike on an up day isn’t necessarily a buy signal. You must take into consideration the move the stock has already made and remember that more often than not, you should let it go if you missed it.

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