Separating the Strong from the Weak Using Stock Charts

By Greg Schnell, Lita Epstein

Focusing on strong stocks is one of the most important themes of the market. Usually those strong stocks are part of a strong sector. You have multiple methods of finding strong stocks and sectors with technical analysis.

  • StockCharts technical ranking (SCTR)
  • Performance chart using sector exchange-traded funds (ETFs)
  • Relative Rotation Graph (RRG) tool

All three of these tools are available if you’re a member of StockCharts.com. (On the home page, you see a green button that says “Free 1-Month Trial.”) From the Members page, you want to focus your tasks on finding strong areas of the market. Understanding how to identify strong sectors and industries quickly is very important. Click along with the following instructions to develop your skill level using the site.

Sector summary

You will need to drill down into the three sectors very quickly. Combining the various StockCharts.com relative strength tools helps you see strength in the market based on your investment timeline. All of these tools are accessed from the Pro Control Center on the Members Page.

In the Pro Control Center, scroll down to Reports & Analysis Tools. Notice the top five buttons in this Reports & Analysis area are all designed to help you see what is going on in relative strength and popularity. Working with the Sector Summary and the Industry Summary, you can find the strong sectors and strong industry groups quickly. Start with the Sector Summary button and use this link to drill down into the industries and stocks.

Pro Control Center stocks
Chart courtesy of StockCharts.com
Pro Control Center.

Drilling down into sectors

Click “Sector Summary (Drill down into the major market sectors)” to open a screen sorting Sector ETFs.

Chart courtesy of StockCharts.com
Sector ETFs.

On this Sector screen, adjust the sort order by clicking on the column headers. Click on SCTR to see the top overall sectors first. On the top left, you can click on different time periods. The default setting is Intraday, but it has been adjusted it to show the change over three months. Other time frames are one week, one month, six months, and a year. Three months is a sweet spot. This period is long enough that you can see a meaningful trend start but not too short.

Drilling down into industries

Click on any sector name and it will take you to the industry lists within that sector. In the chart below, technology is shown. Because you can’t actually buy an industry group, there is no SCTR for each one. Change the time period on the top left to see the industry performance over different time intervals.

The screenshot below has one month selected from the drop-down menu. For industries, one-month changes can identify new trends early. You can use three months as well for swing trading. Longer periods tend to be too long for practical use in identifying new trends. Shorter periods like one week can just be normal market oscillations.

stock charts industries
Chart courtesy of StockCharts.com
Industries.

Almost every sector and industry will have some top-performing stocks, but the best moves take place when the whole industry group is moving and the majority of stocks have SCTRs above 75. By clicking through each of these industries, you can see which stocks are performing well. When large portions of an industry are all surging, focus your attention there. That industry group will probably have one of the largest % Change bars. Above, he computer hardware industry is surging, followed by software.

Drilling down into stocks

To continue drilling down to the stock level, click on an industry name. The image below shows you the stocks in the software industry. Click on the SCTR column to bring the strongest stocks to the top, with an SCTR in the 90s at the top of the list.

stock lists
Chart courtesy of StockCharts.com
A stock list.

The column to the right of the SCTR shows the SCTR peer group. Click on the U column to sort on market cap size. The stocks with no SCTR may be at the top, but scroll down to the market cap–size stocks you like to work with (for example, perhaps you are only a large-cap investor). Then alter the time using the drop-down menu in the top left corner to one week, one month, or three months.

When stocks start to show up on these lists, something is going on that is making investors show interest in them. Stocks that are performing well usually have a reason. Investigate the chart pattern to see whether a stock is changing trend from down to up for a possible entry.

Not all stocks have SCTRs due to a small market cap or a low stock price, or they may be foreign small- or mid-cap stocks.

With this quick technique, combining the Sector/Industry/Stock drill-down with the SCTRs and the % Change bars, you can find strong stocks fast.

Industry summary

Under the Pro Control Center, scroll down to Reports & Analysis Tools. The Industry Summary button brings up all the industries on one page and allows you to change the look-back period in the center at the top of the page. Change from intraday to one-week, one-month, and three-months to find emerging areas of strength.

When you know which industries you’re interested in, you can use the Sector Summary to drill down and find stocks you like based on your chart settings.