Winning System: CAN SLIM Part II

I was posting about the CAN SLIM method in my earlier post and the last alphabet "M" of the CAN SLIM is quite important. 

M = Market Direction. 

Learn to determine the overall market direction by accurately interpreting the daily market indexes' price and volume movements and the action of individual market leaders. 

This can determine whether you win big or lose. You need to stay in gear with the market. It doesn't pay to be out of phase with the market. 

A) To detect a market top, keep a close eye on the daily index.

- Heavy volume without further price progress up, price index is either flat or down. (Distribution)

- Spread from the average’s daily high to its daily low may little wider than on previous day.

- The general market will always turn down 2-4 weeks later after 4-5 specific distribution days over a period of 4-5 weeks.

- A lot of trading but no real price progress.

- Laggards can’t lead the market higher. This is simply a matter of weak leadership trying to command the market. If the best ones can’t lead, the worst certainly aren’t going to do so for very long. 

B) To spot the bottom of the stock market

- A rally attempt begins when a major market average closes higher after a decline that happen either earlier in the day or during the previous session. This trading day considered as Day 1.

- Example: Down 3% in the morning but recovers later and closes higher, or down 2% and rebounds the next day

- Look for “follow through” with a booming gain on heavier volume than the day before, usually occur between 4^th – 7^th day of Day 1.

- Example: index up more than 1.5% gain and volume is higher than average daily volume recorded previously.

- Eliminate sudden spike of certain index stocks that create false follow through.

- Then, begin buying high-quality stocks with strong sales and earnings. 

C) Initial bounce back is feeble

- Index advance in price on the third, fourth and fifth rally day but on volume that is lower than that of the day before. 

- Average makes little net upward price progress compared with its progress the day before.

- Market average recovers less than half of the initial drop from its former absolute intraday high

- When you see these weak rallies and failures, further selling is advisable. 

Above post is abstracted from the book "How to make money in stocks" by William O'Neil.