Using the Signal & Sentiment Stockscore
Stockscores is a technical analysis model to gauge the condition of a stock according to its recent trading activity. For stocks with 200 days of trading history, Stockscores.com is able to calculate a score from 1 - 100.
The Stockscores.com scoring model is proprietary and the specifics of it are not released to the public. Generally, the model is based on popular theories and indicators common to technical analysis.
So long as a stock has traded for 200 days, Stockscores.com can provide its
ratings. The site appraises approximately 20,000 stocks, indexes, trust
units and exchange traded funds. Each is given two scores; the Signal
Stockscore and the Sentiment Stockscore.
The Stockscores are based on analytical models derived from the stock's
trading activity. Each stock starts with 50 points, and the Stockscores are
adjusted up or down based on a number of technical analysis criteria. For
example, if a stock has a bullish MACD Indicator (MACD stands for Moving
Average Convergence Divergence, and measures whether short and longer term
moving averages are converging or diverging relative to one another) it
will get 3 points. If the MACD is bearish, the stock will lose 3 points.
While many of the components of the Stockscores indicators are based on
common technical analysis concepts, there are also proprietary components
that improve the predictive power of the tool. For example, stocks
achieving a statistically significant abnormal gain will receive a number
of points, since abnormal activity is often an indication of a shift in the
perception of fundamentals.
Other important factors in the Stockscores calculation include moves
through support or resistance, indications of accumulation or distribution
of a stock, the presence of high probability chart patterns or measures of
the general trend. Each stock is given its Signal Stockscore based on the
combination of many indicators and concepts, and is put on a 100 point
scale. However, no stock can achieve a Stockscores lower than a 2, or
higher than a 98 (to indicate that there is no such thing as a sure thing
in the stock market).
The Sentiment Stockscore is simply an exponential moving average of the
Signal Stockscore, designed to smooth out the volatile fluctuations that
can exist in the Signal Stockscore.
The Sentiment Stockscore is useful for assessing the mood of the market
relevant to a stock. If investors show a greater willingness to buy a stock
than sell it, the Sentiment Stockscore will be above 50 and rising. Below
50 and falling indicates a greater desire to sell the stock by market
participants.
The important threshold for the Sentiment Stockscore is 60. Stocks with
Sentiment Stockscores of 60 or higher are deemed to have an optimistic
outlook by the market. Below 60 and falling indicates the market is
pessimistic and below 60 and rising indicates the market is neutral. A
Sentiment Stockscore of 80 is not better than a Sentiment Stockscore of 62.
What is important is whether the Sentiment Stockscore is above or below 60,
and whether the Sentiment Stockscore line on the chart is rising or falling.
The Signal Stockscore is a shorter term indicator of investor enthusiasm.
The market is often showing strong buying enthusiasm when the Signal
Stockscore is above 80. If investors are buying the stock with enthusiasm,
it is often because there is a perceived significant fundamental change
that can drive prices higher as more market participants perceive the
improvement.
Stockscores.com applies a score to every stock on North America's major stock exchanges. These scores are updated
throughout the market day, and are based upon the trading activity of each security. During market hours - a weighted
estimate of the daily volume is used to calculated the Stockscore.
How to Use The Stockscores.com Scoring Model
The Stockscore is a filter, a powerful tool to find opportunities in the market. By utilizing this
tool, investors can find stocks with good potential and then apply basic
technical analysis theories of chart recognition to further filter down to
quality short term trading opportunities.
As a basic rule, we want to only consider stocks that have a Signal Stockscore (the raw Stockscore) of
greater than or equal to 80, and a Smoothed Stockscore (a moving average of the
raw Stockscore) of greater than or equal to 60. However, there are some
conditions that need to be kept in mind:
- Most stocks that enjoy good up trends will meet these criteria early in their up trend.
- Not all stocks that fit these criteria will be good opportunities.
- Stocks that are well in to their up trends may still meet these criteria, but the risk of entry is too significant as the opportunity has already passed.
Viewing stocks with Stockscores of greater than or equal to 80 and Smoothed Stockscores of greater than or equal to 60, will reveal a number of stocks. Some will be good opportunities, but
most will either be opportunities already missed or situations worth monitoring but not yet appropriate.
We must visually inspect the charts of the stocks that the scan reveals to make the decision on whether
it is an appropriate opportunity. We mostly want to look for stocks that are breaking from optimistic consolidation patterns and through resistance.
Once we have entered a stock, we maintain our position so long as the stock closes above its support
level. We move the support level upward according to theories of Candlestick
charting and periods of consolidation. If the stock closes below the support
level, we must exit the position even if we are doing so at a loss, as this
will ensure that losses are kept small and profits are locked in.
What follows is an overview of what the Stockscores indicators are based
on, and how to best use them.
The Three Rules
Combined, the Stockscores indicators provide two basic rules. First, only
consider stocks that have a Sentiment Stockscore of 60 or higher, and
second, focus on the charts of stocks that have a Signal Stockscore of 80
or higher. When these two criteria are met, there may be a high probability
opportunity in the market.
Does this mean that we should buy any stock that has a Sentiment Stockscore
of 60 or better, and a Signal Stockscore of 80 or better? No, the
Stockscores are simply a way to put potentially good stock charts in front
of you. They are designed to simplify technical analysis and eliminate many
stocks that do not have a good risk/reward scenario.
The third, and most important rule, is to consider the chart of the stock
and assess whether the pattern has predictive value. Many chart patterns
indicate a probable future trend. For example, a breakout from an ascending
triangle pattern (one where there are rising bottoms toward a flat top, and
decreasing volatility over time) has a high probability of predicting an up
trend.
If the stock you are considering has a Sentiment Stockscore of 63, a Signal
Stockscore of 98, and a high probability pattern, you may be looking at a
very good opportunity to profit in the stock. However, remember that every
stock also has a correlation to the market. To be successful investing, the
investor should also ensure that they are not fighting the trend of the market.
For example, if you are considering a gold stock that has good Stockscores
and a promising pattern, it is also a good idea to check the Sentiment
Stockscore of the gold sector index. If the index has a rising Sentiment
Stockscore line, the market for gold stocks is optimistic, and improves the
potential for the individual gold stock you are considering. However, if
the Sentiment Stockscore is heading lower, the market is pessimistic on the
industry and buying the stock has an added element of risk.
When using the Stockscores indicators, remember to keep it simple. Step
one, ensure that the Sentiment Stockscore is 60 or higher, as that is a
good indication of the market's outlook on the stock. Second, check to see
that the Signal Stockscore is 80 or higher, as that is an indication that
the stock's chart may be showing a good pattern. Third, look at the stock's
chart to ensure that the stock has not already gone up significantly, and
is breaking from a high probability chart pattern.
To find out more about using Stockscores, visit www.stockscores.com.
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