The Sarmiento System - Part I

I have created the Sarmiento System based on the theory that a stock going UP, or DOWN in high volume and an increase in price of more than 5% is likely to continue to trade in the direction of the jump for months to follow, bringing good profits if applied properly. Using Platinum, candidates may be selected in either direction, however, it is important to study the reasons why the stock has jumped. Using Yahoo financial, look for the reasons why the stock has jumped, and make sure that the catalyst is more than just an analyst’s upgrade. Here are some factors I consider important:

1. News that can dramatically affect earnings in the future, however, make sure that these factors are new and thus are causing an upward (or downward) surprise.
2. When Earnings are announced, expectations must have been exceeded by at least 1¢/share, but also make sure that the company is keeping a positive outlook for the next quarter.
3. Earnings warnings or preannouncements by the company itself, these are usually strong catalysts in either direction.
4. Evidence of corporate malfeasance or restatement of earnings of past reports.

I prefer to avoid stocks that are not generally known, and I don’t necessarily like stocks that have moved too much because they
tend to pull back or go sideways for quite a while. I also like to associate my picks with a double bottom or a breakout from a long-term trading range or other technical indicators I will cover with examples.

Here is a list of what I call false catalysts, or catalysts that are hard to interpret, and may affect my trade in unpredictable ways.

1. Single analyst upgrade. If a list of analyst upgrades simultaneously, there is usually a good catalyst behind. Look up the reason. A single analyst upgrade means little to me.
2. Merger agreements. By the time such mergers are made public, the target price is already established, and the stock rallies to that point. A breakdown of such agreements is not likely to occur, I would just avoid these trades.
3. Hostile takeovers. These may have unpredictable impact on stock prices. I just as soon avoid the uncertainty.
4. No news whatsoever is common with stocks that trade below 1M shares, so I avoid those too.

This system should work under any market conditions. Just the same, take a look at the appropriate indices and make sure that they are above the 200dMA for bullish trades and below the 200dMA for bearish trades. This is not an all or none rule, but it would be a good item to test for future reference.