CANSLIM Investing Strategy: Use Supply & Demand to Find the Next 1000% Gainer (S in CANSLIM)

Hey everyone! This is Richard from TraderLion.com, and today we’re diving into the "S" in CANSLIM, which stands for Supply and Demand. The CANSLIM investing strategy was created by William O’Neil, the founder of Investors Business Daily. Each letter in CANSLIM represents a crucial characteristic that has been identified in the greatest winning stocks since the 1800s. Today, we're focusing specifically on how to harness the power of supply and demand to discover stocks ripe for significant price movements.

Let’s kick things off with some insights from O’Neil regarding supply and demand:

• Any Size Capitalization: O’Neil advises that, while any size capitalization can be bought using the CANSLIM system, small-cap stocks tend to be more volatile. Keep an eye on market shifts between small and large caps, as companies that buy back their stock and show ownership by management are particularly attractive. This is bullish because limiting supply can drive prices up.
• Volume Analysis: When a stock pulls back, volume should ideally decrease, indicating no further selling pressure. In contrast, when the price rallies, you want to see volume increase, hinting at institutional buying rather than retail. When a stock breaks out of a price consolidation, volume should jump significantly—40% to 50% above normal, and sometimes over 100%—indicating strong interest.
• Review Base Patterns: Track a stock's base pattern from its initial close down through to the possible breakout point, noting the price movements and volume shifts as you go.

Understanding Stock Structure

The stock structure is fundamental when analyzing supply and demand characteristics. Here’s what you need to know:

A lower float signifies a wider spread between the bid and ask prices, leading to lesser liquidity, which means stocks can move rapidly in either direction. Supply and demand determine the price, and you can use charts to identify accumulation by significant institutional players. These players can absorb available supply, which when coupled with increasing demand, propels the stock price higher.

How to Spot Accumulation

To identify accumulation by large institutions, follow these guidelines:

• Big Volume: Keep an eye on days with substantial volume as these are when large players enter the market. They're not buying tiny quantities; they're amassing large blocks.
• Pocket Pivots: A pocket pivot occurs when the stock either moves up or has a strong close but with volume greater than any down days in the past ten days, signaling subtle accumulation.
• Volume Moving Averages: Check if the day’s volume is above its 20-day or 50-day moving average, indicating a significant uptick that deserves attention.

Examples of Volume Patterns

Let’s look at some real-world stock charts to illustrate these principles:

• SNAP: In August 2020, SNAP exhibited three weeks of tight trading at the bottom of its base, a striking indication of institutional accumulation before a significant breakout.
• DocuSign: During the March 2020 correction, despite broader market weakness, DocuSign showed consistent strong closing ranges—an encouraging sign of institutional support.
• Square (SQ): A recent example includes SQ, demonstrating significant accumulation signs with tight ranges and strong closing trades even amidst fluctuations.
• Skillz (SKLZ): This example highlighted how, despite previous accumulation signs, the stock is currently not showing evidence of a bottoming pattern—it still needs to show solid closing ranges and volume before potentially beginning another uptrend.

Conclusion

In summary, understanding supply and demand is crucial in trading. Analyzing stock structure impacts liquidity, which can dictate how swiftly a stock moves. Combining price and volume analysis allows us to assess demand and identify favorable conditions for investment.

Be sure to monitor big volumes, along with low volume during tight price areas to spot healthy consolidation phases. Thanks for tuning in! If you found this breakdown valuable, leave a like and subscribe to the TraderLion channel. See you guys in the next video!