READ THEN GIVE INPUT
Look bellow at Diedrich coffee DDRX over the past six months (chart at the bottom of this) it has had a massive gain: Stocks like this one and others that I seen come out of what is called a “Narrow Sideways Price Channel”! In other words in this case it was at a relatively FLAT price or price channel when it was a penny stock and then it stated picking up momentum. There is a rule I once remember reading in an investing book that if a stock or commodity is in a narrow flat price range: if it STARTS to gain momentum in will generally continue on in that direction until resistance is met. In other words if there is a 20 dollar stock and it stays almost the same price for 3 month but then all of a sudden starts falling to 18 and bellow, then it will probably KEEP going down for a long time to come i.e. falling demand. The same holds true for this stock if a stock that’s 35 cents which it was and stays flat and then goes to 1.10 there is a good chance it will keep going up i.e. rising demand. I have SEEN this pattern before it’s amazing how it seems to work. SOOOO how can someone screen for this or find this? IS there software for finding horizontal narrow price channels?
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Well there is a couple of problems using this stock as the basis for your thesis. DDRX was added to the Russell 2000 Index in June which means all index and ETF funds that replicate the index would have had to buy it to properly replicate the index returns which means the stock would go up on that news alone. The stock really jumped in April which corresponds with the first period they reported an operating profit in their history, a profit that equates to 25 cents a share which is substantial considering the stock was trading at 49 cents at the time. It is benefiting from the growth in Green Mountain Coffee which has experienced exponential growth as it was recently chosen by McDonald’s as its exclusive coffee maker.
http://www.fool.com/investing/general/2009/07/09/4-winners-that-will-be-losers.aspx
The key to testing a model like you are describing is testing it on a number of different stocks that fall into the screen and ensuring that the model works in more than just one situation. DDRX is a small cap stock that is closely tied to another company and is benefiting from that relationship, that is a great fundamental story, but its not a statistically significant one. Its easy to pick a stock like this and apply your thesis and say "see it worked" but the fact is that this isn’t a normal case.
Golly, if you develop the software, let me know the price.
My clients can buy it from you in a heartbeat.
Heck, I would like to consider buying your software.