StreeTools - Part 3

This is the third part of a series designed to show you how I use the sentiment tools that are available in the StreeToolsTM section of our website. In part one, we explored the "Stocks Tools" section and in part II we looked at the "Trading Indicators" section. Now we are moving on the "Trading Filters" area. When you click on the StreeTools page you will see the following list of filters along the right hand side:

I would classify the above filters into two categories based on either price performance (technicals) or the stock's option backdrop (sentiment). I think that it's a good time to reiterate my stance that this is only one person's interpretation of how to use these tools. Every successful trader must have a trading style that fits with their personality. Therefore, it's possible to have a different useage of these indicators.

Technical Indicators

• Percentage of Price Range Filter
• Relative Strength Filter

I think the technical indicators are the most straightforward to understand. My view is that strength begets strength and weakness begets weakness. So, I use these scans to identify strong and weak stocks. I will then run those stocks through the indicators I outlined in Parts I and II. As I said, my view here is straightforward. I want to see signs of pessimism on strong stocks (as a potential long play) and signs of optimism on weak stocks (as a potential short play).

Sentiment Indicators

• Put/Call Ratios Over 1.0 (Bullish)
• High Put/Call Ratios (Bullish)
• Low Put/Call Ratios (Bearish)
• Unusually High Option Volume
• High Open Interest Changes
• Most Active Option Contracts (Closing)
• Most Active Option Contracts (Intra-Day)

In my opinion, these indicators are not as straightforward and require a little more digging, but the rewards can be worth it. Here, you are starting from the sentiment side and will need to work towards the technicals. The first three indicators listed are geared more towards giving you a general sentiment bias. When I'm looking to balance my exposure, I can use the first three filters to get a quick and dirty list of stocks. I can then filter the names down by looking more in-depth at the sentiment and by adding technicals to the equation.

The last four filters listed are the ones that require the most legwork. The first group was filtered based on a rough bias of bullish or bearish, but this second group is more a presentation of raw data. For those who like to get their hands dirty, you can dig up some interesting ideas, as this is an insight as to what options traders are doing. Since I was brought up in the contrarian school of thought, I look at this data and try to find trends of either optimism or pessimism. I usually don't trade a stock strictly off these filters because this is just one piece of the puzzle.

My intention with this commentary is to point you toward these tools and provide a brief overview. You'll need to delve into each filter to get a feel for what works with your own trading style and philosophy.