Interesting read below The market never lies. It

Interesting read below

The market never lies. It is amazing how often people trade stocks with the benefit of inside knowledge. Today I read an article about a trader who bought 2000 out of the money call option contracts of Shaw Group (SHAW) at $0.25. Today, it was announced that Shaw is being bought for $46 a share. Those options went up to $14, a 5600% return in just a few days. I am sure the securities regulators are looking in to that trader.

I have bought AUTH a few times in the last couple of weeks because it too was trading abnormally, this time in the stock market. Abnormal price gains with abnormal volume point to something going on at the company and when it happens twice in two weeks, you have to wonder what is up. Friday brought the answer, the company is being bought by Apple (AAPL). The stock moved from $5 to $8.50 in a single day. For more on this take a look at this week's Stockscores Market Minutes video which you can watch on YouTube by clicking here.

It is illegal to trade on inside information but it is not illegal to trade off of market activity. The market is giving you a message, listen to it! Each day I look for stocks trading with abnormal price action and abnormal volume. You can do this using the Stockscores Market Scan tool, I created specific filters for this. It takes about 10 minutes to search the entire market for stocks that are trading abnormally.

I like to see stocks that start trading abnormally out of very quiet trading with no apparent reason. From the list of stocks that the Market Scan finds, I inspect the charts to see which show a market that is surprised by something. I don't want to chase stocks that have been going up for a while, I want to find those that the market has not noticed yet, where the abnormal activity is being driven by a still small group of people.

Abnormal action is not always driven by a company buyout, it can often be some other significant fundamental event. A couple of weeks ago I found STEM trading abnormally shortly after the open of trading. It nearly doubled in price since. To be frank, I have no idea why.

The reason does not matter, as traders we are concerned solely with where price goes. I often say that my definition of a good company is one that goes up after I buy it. Focusing on abnormal trading action can often point you in the right direction toward that pursuit.