How A Strong Stock Is Identified

A reader asked me today how a strong stock was identified. They read my post called What You Should Look At When Investing In A Stock. This is a key question. Every day, I get my IBD, I ask myself which stocks should I focus my time reviewing what I consider strong stocks. The first step for me is to look for stocks that show strong price and volume action. If they pop their head up on a price increase of at least 2 percent and a volume increase of more than 100 percent above average, then to me they warrant further review.

I start here because a key component of a stock's ability to go up in price is institutional support. When the big money flows into a stock, the price of a stock goes up because of increased demand. Taking a position in a stock that starts finding institutional support is ideal because you can ride the price up with them.

You can find stocks like this by watching the Stocks on the Move screen in the IBD. It focuses on stocks doing increasing in price and volume. The reason this screen was developed by IBD was that it uncovers stocks that are under accumulation.

There are a couple of other places to look for strong stocks. The first place is to look at stocks making new 52 week highs. Stocks that skyrocket in price also make new highs. You can also scan for stocks in the Timesaver table as well as look at the earnings up column. There you can find stocks that have higher earnings reports. Put those on your watch list and start watching for breakouts in price and volume.

The great thing about stocks with strong institutional support is that it draws more and more buyers in. This compounds the increase in a stock's price.

Be careful though. Stocks that go up in price also decrease at some point once this demand disappears. If you buy into a stock and the big money leaves, you should leave then. How do you know when to leave? When the price closes lower on higher volume than average, this tells you that the strong stock you once found might be weakening.

Good luck in your stock market investing endeavors.