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PMO Buy Signals: The Good And The Bad.

  • Written by Syndicated Publisher 2 Comments2 Comments Comments
    January 16, 2012

    About 5 months ago, Decision Point added a brief Daily Chart Spotlight to its facebook page and StockTwits tweets. They are a brief review of a stock or ETF chart that has just posted a PMO (Price Momentum Oscillator) BUY or SELL signal on one of our Daily Tracker Reports on our website.  If one catches my eye I’ll do a short alert to the signal and highlight on the chart the positives and negatives (if any).

    (Excerpt from the January 13, 2012 blog for Decision Point subscribers.)

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    Since I was given the opportunity to post a Weekly Chart Spotlight for Carl, I thought it would be a great opportunity to do a more in depth review of a chart that would have been posted for a daily spotlight.  In addition, I can show you a chart that wouldn’t have been posted, as I deemed that BUY signal not ripe for a good outcome.

    Below is an excerpt from the SPX+ Tracker Report.  It covers the SPX stocks, as well as the Dow 65 and Nasdaq 100 stocks.

    Screen shot 2012-01-13 at 10.15.28 AM

    The beauty of this report is this–if one of these stocks interests you, simply click on its name in the report and the 1-year daily bar chart pops up for your review.  Some days there are 25 or 30 BUY signals.  It is great to be able to click down on each one, quickly look at the chart and move on until I find the chart with the most potential.

    I’ve highlighted the two stocks we’ll cover today.  Rockwell Automotive (ROK) is deemed to be the ‘good’ BUY signal chart and Check Point (CHKP) is the ‘bad’ BUY signal chart.

    Below is the daily chart for ROK.  I’ve annotated what I found positive about the chart.

    ROK daily

    The PMO BUY signal itself is highlighted in the bottom of the thumbnail.  We see that the BUY came as ROK had a successful breakout from a short-term continuation pattern.  Additionally, the stock had a recent Trend Model long-term BUY signal as the 50-EMA crossed above the 200-EMA and previous to that, a Trend Model intermediate-term BUY signal as the 20-EMA crossed above the 50-EMA.  A few negatives about the chart would be that volume was contracting on the signal and the PMO is trending lower.

    The most important aspect of this buy signal is that the PMO crossover occurred above the zero line, and it is part of a rally that has been in progress since September. There may be plenty of gains still to come, but this signal is not as robust as one that originates at deeply oversold PMO levels.

    One thing I am unable to do in our brief daily spotlights is review the weekly chart in addition to the daily chart.  If you are seriously looking at a stock for investment purposes, it is a good idea to review the weekly chart to find out long-term trends.  Below is ROK’s weekly chart.  Positive is that the weekly PMO is on a BUY signal and there was a very recent Trend Model BUY signal.  Also positive is a recent breakout from declining tops line resistance on expanded positive volume for the week.

    ROK weekly

    Time to check out the ‘bad’ PMO BUY signal.  This is a teachable moment on why you do not want to rely strictly on mechanical model signals to make your investment decisions.

    Looking at the daily chart for CHKP we see some inherent problems right away.  Even without the trend lines drawn in, I would have quickly dismissed this chart simply because it is clearly a stock in decline.  Looking more closely, we see that while it is currently on a long-term Trend Model BUY signal, it is quickly approaching a long-term SELL as the 50-EMA is moving toward a negative crossover with the 200-EMA.  Back in November, a Trend Model intermediate-term NEUTRAL signal generated (had the 50-EMA been below the 200-EMA it would have been a SELL).  Now we look at the PMO, while it is in oversold territory, it has been flat and extremely noisy having numerous signals over the past few weeks.

    Today we have the benefit of seeing the outcome of this BUY signal:  a steep price decline and a new PMO SELL signal.

    CHKP daily

    Since we pulled the weekly chart for ROK, let’s look at the weekly chart for CHKP.  While the Trend Model is technically on a BUY signal, the 17-EMA topped in October and is headed for a negative crossover with the 43-EMA.  There is a bearish double-top formation and price is nearing a possible break below the neckline on expanded negative volume.

    CHKP weekly

    Bottom Line:  Decision Point Tracker Reports offer a quick way to screen stocks using the PMO BUY and SELL signal flags and easy click-through to view stock charts.  Mechnical model signals like the PMO, should be considered flags or alerts for further review.  As the examples above show, analyzing the charts will reveal whether the stock has the potential to follow-through on the signal generated.

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    Erin Heim 
    Erin Swenlin Heim is the daughter of Carl Swenlin, the president and founder of DecisionPoint.com. Erin holds a Bachelor’s degree in Mathematics from the University of Southern California and is a graduate of the Air Force Institute of Technology where she earned a Masters degree in Information Resource Management.  Erin began working in Decision Point around 1997, starting with billing and customer service and expanding into processing daily website updates. She is engaged in a continuing apprenticeship to Carl, who is helping her build a solid foundation in the Decision Point method of technical analysis.

    Email:  eheim@decisionpoint.com.

    Images: Flickr (licence attribution)

    About The Author

    Carl SwenlinCarl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.


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