A Simple Scoring System to Identify the Best Nasdaq 100 Stocks to Go Long or Short
When trading on the daily chart, it’s essential to identify the strongest and weakest stocks within a given set to make informed trading decisions. My approach is straightforward yet effective: each day, at the same time, I evaluate the 10 largest holdings in the Nasdaq 100 index using a binary scoring system based on specific technical indicators. This method helps determine which stock to go long on (strongest) and which to short (weakest). Below, I explain my scoring system, the rationale behind it, and provide a practical example.
The Scoring System
To score each of the 10 largest Nasdaq 100 stocks, I use the following technical indicators:
20-Period Simple Moving Average (SMA)
50-Period Simple Moving Average (SMA)
Parabolic Stop and Reverse (PSAR)
13-Period Exponential Moving Average (EMA)
14-Period Relative Strength Index (RSI) with a 9 EMA overlay
For each indicator, I answer specific questions to determine the score, where each answer yields either +1, -1, or 0. Here’s how the scoring works:
Is the price above the 20-period SMA?
Yes: +1
No: -1
Equals the SMA: 0
Is the price above the 50-period SMA?
Yes: +1
No: -1
Equals the SMA: 0
Are the 20 and 50 SMAs sloping in the same direction?
Yes, Up: +1
Yes, Down: -1
No (if they diverge): 0
Is the price above/below and confirmed by the slope of the 13-period EMA?
Yes, Up: +1
Yes, Down: -1
Equals the EMA: 0
Is the PSAR showing a buy signal?
Yes: +1
No: -1
After answering these questions, I total the scores for each stock. The stock with the highest score is considered the strongest, and the one with the lowest score is the weakest.
Rationale Behind the Indicators
The selected indicators serve a clear purpose in determining the trend strength and momentum:
Moving Averages (20 SMA, 50 SMA, 13 EMA): These provide insight into the overall trend and its strength. If the price is above the SMAs and they are sloping in the same direction, it indicates a strong trend.
PSAR: This helps identify potential reversals or the continuation of the current trend. A buy signal suggests upward momentum.
RSI with EMA Overlay: This combination provides a clear view of the stock’s relative strength and its momentum, helping confirm the direction indicated by the SMAs and PSAR.
Consistent Timing for Consistent Results
To ensure consistency and reliability, it is essential to perform this analysis at the same time each day. Whether it's during the market open or close, consistency in timing helps in comparing day-to-day changes accurately.
Example Application
Let’s apply this scoring system to two of the largest Nasdaq 100 stocks:
Apple Inc. (AAPL):
Price above 20 SMA: Yes (+1)
Price above 50 SMA: Yes (+1)
20/50 SMA slope direction: Up (+1)
Price confirmed by 13 EMA slope: Yes, Up (+1)
PSAR buy signal: Yes (+1)
Total Score: +5
Meta Platforms, Inc. (META):
Price above 20 SMA: No (-1)
Price above 50 SMA: No (-1)
20/50 SMA slope direction: Down (-1)
Price confirmed by 13 EMA slope: No, Down (-1)
PSAR buy signal: No (-1)
Total Score: -5
In this scenario, AAPL is the strongest stock with a score of +5, and META is the weakest with a score of -5. According to this strategy, you would consider going long on AAPL and short on META.
Conclusion
This simple yet effective scoring system allows traders to identify the strongest and weakest stocks among the largest holdings in the Nasdaq 100 daily. By consistently applying this method, you can make informed decisions on which stocks to trade, maximizing your chances of capitalizing on market trends. The key is to maintain consistency in your analysis timing, ensuring that your comparisons are accurate and reliable.