Understanding Stock Scans

With over 10,000 stock charts to look at every day, professional analysts use sophisticated technical scanning programs to quickly find stocks with the best potential for profitable moves.

 How Stock Scans Work

Let's start with a definition:

A stock scans applies a technical formula to a large population of stocks and returns a list of stocks that meet some filter criteria associated with that formula.

By technical formula, we mean a calculation that uses a stock's price data (open, high, low, close) and/or volume data over a given period of time to compute some value.
By large population we mean an easily defined collection of stocks that is too large to screen by hand.
By filter criteria, we mean the range of valid values for the results of the calculation.

Now let's look at the description of a very simple stock scan:

All NYSE stocks whose current 50-day moving average is anywhere above their current closing price.

In this example, the technical formula is the 50-day moving average formula, the large population is the set of all stocks traded on the New York Stock Exchange (NYSE), and the filter criteria is any value above the given stock's current closing price.

To "run" this scan, a computer must have at least 50 days worth of price and volume data for every stock listed on the NYSE. For every stock listed on the NYSE, it must add up the last 50 closing prices, divide the result by 50, and then compare that result to the current closing price. If the results is above that closing price, the particular stock is added to the results of the scan. If not, the stock is ignored. The computer then repeats the process for the next NYSE stock.

 Finding Useful Scans

So how do you know if a stock scan is useful or not? There are several factors to look at:

• Simplicity
• Selectivity
• Technical Accuracy
• Philosophic Accuracy

Simplicity:
Scans with complex technical formulas, complex filter criteria, and very large source populations can take a very long time to run. Faster computers have made this less of a problem than in the past, however -- all other things being equal -- simpler is better.

Selectivity:
Selectivity refers to the number of stocks that a scan returns. Highly selective scans will often return no results -- on the day the scan was run, no stocks met the scan's filter criteria. On the other hand, loosely selective scans often return more than 10 percent of the original population. That's more than 1000 stocks if the original population is "all listed US stocks". Useful scans tend to be fairly selective, but will rarely return an empty result list.

Technical Accuracy:
Scans are designed to find stocks that are in a specific technical situation. If a scan is supposed to return stocks that have recently made strong upward moves, but most of the stocks it returns have not done so, then the scan should probably be refined until it is more accurate.

Philosophic Accuracy:
Scans are designed with a particular investing philosophy in mind. Value investors use scans that try to find weak stocks that are showing signs of a turnaround. Growth investors use scans that try to find stocks that have recently moved higher on strong volume. Short-term traders use quick, volatile indicators in their scan's technical formulas while longer-term investors may use slower, less jittery indicators. And so on.

Philosophic Accuracy refers to a scan's ability to find stocks that meet the designer's investing philosophy. This is probably the most important factor for evaluating a scan but unfortunately, it is also the hardest to measure objectively. Each investor has to look at the results from a scan over a long period of time and determine for themselves if the majority of the stocks it returns are "useful" to them. A scan that one investor finds valuable may seem like a waste of time to another.

 Using Scan Results

Before we get into the specifics of the scans that we provide, let's discuss the right way (and the wrong way) to use technical scan results.

Probably the most important thing to keep in mind is that scans find stocks that are in potentially promising positions. As with most forms of financial analysis, nothing is guaranteed. While a well-designed scan can filter out lots of stocks in unpromising positions, that doesn't mean that all of the stocks it does find will be useful to you.

Here are the steps we recommend you follow in order to get the most out of our scan results:

1. Determine your trading philosophy - Are you looking for short-term or long-term opportunities? Are you looking for strongs stocks that may get stronger or weaker stocks that may be turning around? Do you care about the price of the stock? What about average daily volume? And so on...
2. Understand the scan's indicators - Are the strengths of the indicator(s) in the scan compatible with your trading philosophy? Are the time periods used to calculate the results similar to your time horizons?
3. Review charts of stocks selected by the scan - What percentage of the stocks selected by the scan have charts that look promising to you? How many false results were generated?
4. Track the results for several trading periods - How many of the "promising" stocks actually moved in profitable ways? Would any of the unprofitable stocks have caused you to lose more than you are willing to risk in the market? Did the stocks move primarily due to technical or fundamental factors?

After a while, you will begin to see patterns in the behavior of the stocks that a particular scan selects. You will develop a sense for the stocks that may repeat those patterns and that can help you trade or invest with more confidence. While risk and uncertainty can never be eliminated, taking the time to become familiar with the results of a particular scan will usually reduce both.

 Scan Definitions

Below are the definitions for the current collection of scan that StockCharts.com provides. Click on the description of the scan to see today's results. To avoid false signals that are often generated by thinly traded stocks, all of the scans on StockCharts.com only consider common stocks traded on the NYSE, NASDAQ, or AMEX that have averaged more than 40,000 shares traded per day for the last 20 days.

Stocks Setting a New 52-week High:
Definition: Stocks that closed at a price that was higher than any previous 'high' value during the previous 260 trading sessions.

Interpretation: In his book "How to Make Money in Stocks", William J. O'Neil describes the 'Great Paradox' of the stock market: "...what seems too high and risky to the majority usually goes higher." O'Neil goes on to recommend checking into stocks making the new-high list for the first time in a bull market.

Stocks Setting a New 52-Week Low:
Definition: Stocks that closed at a price that was lower than any previous 'low' value during the previous 260 trading sessions.

Interpretation: This is a list of stocks that have probably been weak for an extended period of time. So-called 'Value' investors may investigate these stocks to see if they show any signs of a turnaround in the near future. If you believe in "Buy Low, Sell High", this list is for you.

50-day MA moved above the 200-day MA:
Definition: Stocks that had the simple moving average of the last 50 closing prices move above the simple moving average of the last 200 closing prices.

Interpretation: Typically, the 50-day MA crosses the 200-day MA soon after a stock has turned around and started moving higher after a multi-month downtrend. Many longer-term value investors consider this kind of crossover to be "the last chance" to get in on a stock that should perform well in the mid-to-long term.

Stocks whose 50-day MA crossed below their 200-day MA:
Definition: Stocks that had the simple moving average of the last 50 closing prices move below the simple moving average of the last 200 closing prices.

Interpretation: The 50-day MA typically moves below the 200-day MA because these stocks have been moving lower for a while now. It is commonly viewed as a very bearish signal and these stocks can be expected to continue declining in the near term.

Stocks that had a Bullish MACD Crossover:
Definition: Stocks whose MACD line crossed above the signal line today after being below the signal line for the previous three days. The MACD parameters used are 26 and 12 and the signal line is a 9-day EMA of the MACD line.

Interpretation: Bullish MACD crossovers typically happen soon after a stock has started to rise after a downtrending period.

Stock that had a Bearish MACD Crossover:
Definition: Stocks whose MACD line crossed below the signal line today after being above the signal line for the previous three days. The MACD parameters used are 26 and 12 and the signal line is a 9-day EMA of the MACD line.

Interpretation: Bearish MACD crossovers typically happen soon after a stock has started falling after a significant rise.

Oversold Stocks that had an Improving RSI:
Definition: Stocks whose RSI line moved above 30 today after being below 30 for the previous three days. The RSI period used is 14.

Interpretation: This scan shows a list of stocks that are moving higher after experiencing a significant downtrend.

Overbought Stocks that had a Falling RSI:
Definition: Stocks whose RSI line moved below 70 today after being above 70 for the previous three days. The RSI period used is 14.

Interpretation: This scan shows a list of stocks that are moving lower after enjoying a recent rise in prices.

Stocks that moved above their upper Bollinger Band:
Definition: Stocks which closed above the upper line of their 20-day Bollinger Band and which were below that same band after the previous trading session.

Interpretation: This scan shows a list of stocks that have typically risen quickly in recent days. They may 'bounce back' shortly.

Stocks that moved below their lower Bollinger Band:
Definition: Stocks which closed below the lower line of their 20-day Bollinger Band and which were above that same band after the previous trading session.

Interpretation: This scan shows a list of stocks that have typically fallen quickly in recent days. They may 'bounce back' shortly.

Stocks with improving Chaikin Money Flow:
Definition: Stocks for which the 21-day Chaikin Money Flow oscillator has just moved above the +20% level.

Interpretation: This scan shows a list of stocks that are now showing bullish price and volume characteristics during the past week.

Stocks with declining Chaikin Money Flow:
Definition: Stocks for which the 21-day Chaikin Money Flow oscillator has just moved below the -20% level.

Interpretation: This scan shows a list of stocks that are now showing bearish price and volume characteristics during the past week.

Stocks with Bullish Engulfing Patterns:
Definition: Stocks that finished the day with a bullish engulfing candlestick chart pattern on their end-of-day chart.

Interpretation: This scan is designed to find stocks that form valid bullish engulfing patterns while in a short-term downtrend.

Stocks with Bearish Engulfing Patterns:
Definition: Stocks that finished the day with a bearish engulfing candlestick chart pattern on their end-of-day chart.

Interpretation: This scan is designed to find stocks that form valid bearish engulfing patterns while in a short-term uptrend.

Stocks with Piercing Patterns:
Definition: Stocks that finished the day with a piercing candlestick chart pattern on their end-of-day chart.

Interpretation: This scan is designed to find stocks that form valid piercing patterns while in a short-term downtrend.

Stocks with Dark Cloud Patterns:
Definition: Stocks that finished the day with a Dark Cloud candlestick chart pattern on their end-of-day chart.

Interpretation: This scan is designed to find stocks that form valid dark cloud cover patterns while in a short-term uptrend.