Combining TA With the Dark Science of Fundamentalism

How to use breaking news and technical analysis to pick a winning stock to buy -- or a losing stock to short.
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The other day I received a note from a reader wanting to know how to find good stocks to trade. Obviously, my preferred way is to simply let my software scan through every tradable stock and present me with a list of the top candidates.

Still, that method's certainly not for everyone, as there are a variety of ways to find good trades. One is to search the new-highs list published just about everywhere. A great way to find strong candidates, that angle has only one flaw: It consistently weights you to the long side (unless you're gutsy and want to short some of these highfliers).

However, since the

TheStreet.com

site has been revamped, I've noticed an even easier way to find good trades. When I daytraded, my goal was to always find stocks "in the news" that I thought would move that day.

Technical Analysis: Join the discussion on

TSC

Message Boards.

This emphasis on movement, though, doesn't have to be confined to daytrading. These types of stocks often make multiple day moves, and if you use solid TA and appropriate money management, you can find good trades regularly.

The best place to find these hot stocks? The

TSC

Breaking News section, right in the middle of the home page.

Therefore, what I wanted to do was go in on a random day, look at all the breaking news posted and then pick a few stocks to trade from that list. To level the playing field, I'll assume that many of you either can't or won't do anything with this news until the following day.

Frankly, this is kind of a fun way to trade, and for you technicians who like to combine a bit of that dark magic they call fundamentals, it's a nice combination.

Here's the Breaking News section from

TSC

on Nov. 2. This is just a snapshot, by the way, and the entire news section is always up on the site if you can't get to it until the end of the day.

As you can see, there are six stocks to choose from:

Oxford Health Plans

(OXHP)

,

Newbridge Networks

(NN)

,

General Electric

(GE) - Get Report

,

Abbott Laboratories

(ABT) - Get Report

,

Boeing

(BA) - Get Report

, and

Gilead Sciences

(GILD) - Get Report

. (I threw in Gilead Sciences, because even though it's not in the Breaking News section,

Jesse Eisinger's

write-up certainly could be classified as such.)

In addition, I'll trade these as if I would have traded them on the morning of Nov. 3, sticking as closely as I can to the GBS

Classic rules and money-management schemes. Obviously, you'll want to employ your own methodology, but this will serve as a good starting point.

With that in mind, let's tackle each stock one by one, first by looking at the chart as you would have seen it the next morning, and then a few days later.

The first stock, Oxford Health Plans, you'd definitely want to play long, unless the chart looked incredibly lousy.

Next up is Newbridge Networks. Earnings warning? That cries out for a play on the short side.

Regarding General Electric, I'm not sure the entire "Welch retiring" saga is what I'd call hot. Sudden, surprising executive departures, as

Herb Greenberg

points out, maybe. This news, though, doesn't even warrant looking at the chart.

The Abbott Laboratories item is also a pass. I like headlines that are obvious right from the start. Maybe to those following the story, this is huge. To me, the ramifications aren't clear. And if it's not clear and straightforward, I move on to easier plays.

The Boeing news, however, does look pretty clear. Delaying shipments? Stock tumbles? Sounds like another potential short.

The final candidate is Gilead Sciences. You could make the argument that the real story is as murky as Abbott Laboratories'. But, whoever wrote this headline, certainly tried to cast Gilead in a negative light. To me, it's worth a quick check of the chart.

OK, so let's look at what we had: six candidates, of which we looked at four charts and traded two stocks. Of the two, both were 5% winners, and both closed within two days. Pretty tidy trading.

Now, are they all this easy? You know that answer. But can many of your days look like this? Absolutely. Therefore, here are some keys to using

TSC

Breaking News to trade profitably.

    Only look at the charts where you think the news is obviously bullish or bearish. Or better said, what you think Joe Average would conclude is obvious. Unless your time frame is fairly long, don't be a contrarian. In other words, if the news is bad, don't think it's a great buy signal. It probably isn't, at least for the short term. Adhere to your strict rules of trading. It would have been easy for me to short Boeing. But I never short a stock if it's gapped down two days in a row. With Boeing, of course, I got lucky, as it might have dropped even further, making it a potentially easy win. Those will happen, of course, but you'll be better off in the long run by being disciplined and sticking to your method.

Remember, in a bull market, bear market or sideways market, there's always something juicy to trade. And the clues are right on

TSC's

home page.

Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Smith writes five technical analysis columns for TheStreet.com each week, including Technician's Take, Charted Territory and TSC Technical Forum. While he cannot provide investment advice or recommendations, he welcomes your feedback at

gbsmith@attglobal.net.