Last week we introduced the "High CI Prospects" search to you. This search is aimed to find big winners while they are still in the early stages of development. It looks for stocks hitting 52-week Price highs on high volume after breaking out of a 26-week Price channel. Stocks with the smoothest chart patterns tend to be the best performers. Mr. Gordon White did an excellent job at the VectorVest University last week of illustrating how to cherry pick for the big winners. In this week's essay, I will go into more detail on the features and application of this promising strategy.

SEARCH CRITERIA: The whole idea here is to identify a significant event as compared to a Price movement due to random noise. Therefore, I used a 52-week Price high rather than a 26-week or 13-week high because it gives a more meaningful and reliable signal. It is also more compatible with the requirement of having the stocks trade in a long-term channel prior to breaking-out. I prefer to use the 52-week high search run in the weekly mode rather than the daily mode because it is less discriminating and returns more stocks for consideration. The Percent Volume Change of >= 200 is high enough to reflect a statistically significant event, but low enough to capture as many prospects as possible. Channel height is, by far, the most sensitive criteria to set. While a narrow channel would, of course, be more consistent with seeing a smooth, flat chart pattern, I went with a 50% channel height because I wanted the search to return more stocks. The low AvgVol criteria of > 20,000 and absence of any Price criteria were aimed to allow small stocks, flying below the radar to qualify for examination. You should feel free to change any of these criteria to suit your particular needs.

SEARCH EFFICACY: In developing the "High CI Prospects" search, I used Quick Test an awful lot. I also ran a number of back-tests with Portfolio Manager and the Auto-Tester. While I found that sorting by VST gave the best Quick Test results, and they were quite good, it did not produce outstanding results in back-testing with Portfolio Manager. That's why I deferred to Cherry Picking. To verify the efficacy of the search, Mr. Steve Chappell, our Manager of Educational Services, ran hundreds of Quick-Sims on the Simulator. Generally speaking, the results were excellent. He will describe this work as part of this week's "Strategy of the Week" presentation at the VectorVest University. Thank you Steve, it's nice to receive confirmation that the search is robust.

PROSPECTS WATCHLISTS: I hope you have already begun building your WatchList of High CI Prospects for April. If not, Steve will show you how to create this WatchList and add the stocks found by the "High CI Prospects" search. He will also show you some things to do to improve your cherry picking skills. Since last week, I've been updating my WatchList every night. As of last night, I had 106 stocks in the WatchList. Incidentally, I named the WatchList Group "High CI Prospects" and I labeled each monthly WatchList I've made so far by year and month, i.e., "2007 - 04 (Apr)." Now this is where the cherry picking starts.

I could do my cherry picking only by looking at the chart pattern of each stock. So last night I opened the "2007 - 04 (Apr)" WatchList and began looking at 1-Year Daily Graphs of the stocks presented on the screen. Since I was looking for stocks that were trading in a relatively tight channel; then hit a 52-week high on well above average volume, I adjusted the graph setting to show volume at the bottom of the screen. The first graph I looked at was that of Chordiant, CHRD, the top ranked stock by VST. It looked pretty good to me, so I put it into another WatchList called "HCIP Favorites." (Steve will show you how to do this.)

The next stock was Medimmune, MEDI. Its chart pattern also looked pretty good, but I did not add it to my "HCIP Favorites" WatchList. The pop in price was due to news that MEDI was considering putting itself up for sale. The moral here is to not buy any of these stocks until you have checked to see what caused the pop in price. (Steve also will show you how to do this.) And so I continued looking at graphs until I encountered U S Home Sys, (USHS); Eagle Hosplty, (EHP) and MDU Resrces, (MDU). Try looking at the graphs and see whether you would agree with my cherry picking choices. You won't have to build the "2007 - 04 (Apr)" from scratch because we have sent it to you in a new WatchList Group called "High CI Prospects."

INCUBATION: A stock's price behavior shortly after it pops is often a very good indicator of whether it is going to have legs or not. For example, High CI Prospects found Sparton Mtrs, SPAR, on April 27, 2006. Shortly thereafter, the market suffered a severe correction, but SPAR's price held up very nicely. This was a good sign of the support underlying the stock and the possibility of a good run. So it's not a bad idea to see how these stocks hold up after they spike higher. I call this the "incubation" period. In order to help you see how these stocks have been doing, we have actually sent six "High CI Prospects" WatchLists to you. They could be very useful to you. For example, Cramer raved last night about Annaly Mortgage, NLY. I remember seeing it in my "2007 - 03 (Mar)" WatchList. The pattern looks good.

Speaking of Cramer, Spartan Mtrs, SPAR, a classic HCIP stock, was his headline stock about a week ago. On Monday, he headlined Rose Rescs, ROSE, and the stock popped on Tuesday. Our "High CI Prospects" search caught it and its chart pattern also looks good.

OPEN SEASON: As a final word, I want to repeat that it's always open season for cherry picking. I have found some terrifically big winners in the worst possible markets. For example, Teeny Boppers found SOHU at $1.70/share in June 2002 and it ultimately went to $42.68/share. Teeny Boppers also found SINA at $2.33/share in August 2002. It soared to $48.25/share. I'm happy to say "High CI Prospects" also would have found both of these stocks had it existed then. So don't stop prospecting when the market turns sour. You can find big winners anytime by applying "High CI Prospects" and these Cherry Picking Pointers.

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