Why Institutional Sponsorship Matters in Position Trading

Position trading is a strategy where traders aim to capture gains from price movements over several months or even years. Unlike long-term investors who stick to a “buy and hold” approach, position traders actively monitor the market and adjust their decisions based on long-term trends and conditions, but tend to hold longer than a Swing Trading Strategy.

Position Trader Screeners demand a strong conviction in a stock’s long-term growth trajectory as trades will be held through multiple earnings cycles and basing formations.

Accumulating shares to form large positions requires focusing on stocks with significant institutional sponsorship. Basic liquidity criteria should be used in conjunction with all of your screens.

Liquidity refers to how easily you can buy or sell a stock without causing major price swings. For position traders, stocks with high liquidity allow for smoother entries and exits, even when trading significant volumes.

Institutional investors, like mutual funds, hedge funds, and pension funds, are key players in driving liquidity. Their large buying or selling activities create substantial trading volume, which makes it easier for other traders to execute their trades without major price disruptions.

Keep basic liquidity criteria in mind when diving deeper into specific strategies for identifying and capitalizing on stocks with future growth potential.

CANSLIM Strategy: A Proven Method for Growth Stocks

Developed by William O’Neil, the CANSLIM strategy is a time-tested approach to identifying high-growth stocks. It focuses on companies with strong fundamentals, such as growing earnings and sales, combined with market leadership and innovative products.

This comprehensive framework helps position traders to zero in on stocks with the greatest potential for long-term price appreciation. Each letter in the acronym CANSLIM represents a key trait of successful growth stocks:

• C: Current quarterly earnings growth
• A: Annual earnings growth
• N: New products, services, or market conditions
• S: Supply and demand dynamics (such as low float or institutional buying)
• L: Leader vs. laggard (stocks outperforming their peers)
• I: Institutional sponsorship
• M: Market direction (only buy when the market is in an uptrend)

For position traders, this method is particularly useful because it highlights stocks with long-term growth potential. When screening for stocks, focus on those showing high relative strength, positive earnings, and sales near new highs.

This Screener Preset includes the basics of CANSLIM investing. When applying the CANSLIM strategy to your stock screeners, look for the following:

• Institutional sponsorship: Stocks with heavy institutional buying tend to be more liquid and have the backing of experienced investors.
• Earnings and sales growth: Focus on companies with quarterly and annual earnings growth of at least 25%-30%. Triple-digit growth is even better.
• Relative strength near highs: Prioritize stocks with high relative strength ratings, as these are often market leaders.
• New highs: Search for stocks near or making new highs, which indicates strong demand and momentum.

52-WeekHighs: How to Find the Market Leaders

Stocks hitting their 52-week highs often represent the strongest performers in the market. These are the companies that consistently outperform their peers and show leadership qualities.

A stock breaking into a new high is often in an uptrend, meaning demand outweighs supply. When a stock clears its previous resistance level, it signals that buyers are willing to pay higher prices.

The saying “stocks that make new highs will continue to make new highs” often holds true, especially when the broader market is in an uptrend and the stock shows leadership characteristics.

Adding a Daily Closing Range (DCR) filter to your screener ensures that the new high is backed by buying strength.

DCR measures how close a stock’s closing price is to its daily high. A strong DCR indicates that the breakout was accompanied by demand, helping you avoid false signals caused by low-volume or weak breakouts.

Finding stocks at their 52-week highs is an excellent starting point for identifying market leaders. These stocks are already outperforming and have the potential to continue climbing, especially when supported by strong fundamentals and buying strength.

Relative Strength Line New High: How to Spot Outperforming Stocks

Relative Strength (RS) measures how a stock performs compared to the overall market, typically benchmarked against an index like the S&P 500 or Nasdaq. It’s one of the most important tools for identifying stocks that are outperforming their peers.

When a stock’s RS line is rising, it indicates the stock is gaining strength relative to the market. If the RS line is making new highs, it means the stock is outperforming the majority of the market — a clear signal that it could be a leader worth watching.

Leading stocks tend to show high relative strength before making big price moves. This is because institutional investors often start accumulating shares early, pushing the stock higher even when the broader market is flat or declining.

By tracking RS, you’re effectively following the “smart money.” A rising RS line shows the stock is in demand, which often leads to higher prices over time.

Stocks with RS lines hitting new highs are some of the best candidates for position trading. These stocks are showing clear leadership qualities by outperforming the overall market.

In down-trending markets, RS New Highs Before Price (RSNHBP) is a powerful signal. These are stocks whose RS lines are advancing even while the broader market or the stock itself is consolidating.

• While most stocks are declining, RSNHBP stocks are holding steady or moving sideways indicating underlying strength.
• When the market recovers, these stocks are often among the first to break out and lead the next rally.
• A climbing RS line during a weak market suggests institutional investors are quietly accumulating shares, setting the stage for future gains.

Relative strength is one of the most reliable indicators for finding market leaders. By focusing on stocks with RS line new highs or RS New Highs Before Price, you can identify outperformers early, even in challenging markets.

Earnings Per Share: A Key Metric for Growth Stocks

Earnings per share (EPS) is a crucial measure of a company’s profitability. It represents the portion of a company’s net income allocated to each outstanding share of stock. In simpler terms, EPS shows how much profit a company is generating for its shareholders.

Position traders monitor strong and consistent EPS growth, which often signals a company’s ability to deliver long-term value and sustain its upward momentum. Leading stocks don’t just have solid earnings; they show consistent and accelerating growth quarter over quarter and year over year.

The best-performing stocks typically exhibit at least 30% EPS growth quarter over quarter for multiple quarters

As a position trader, your goal is to hold stocks over months or years to capitalize on large price moves. Stocks with sustained EPS growth over multiple quarters provide the confidence needed to weather normal market corrections.

While 30% growth is a solid benchmark, stocks reporting triple-digit EPS growth are often the ones that see explosive gains. Triple-digit earnings growth indicates the company is gaining momentum, whether through increased sales, improved efficiency, or new revenue streams.

Sales Growth: The Foundation of Profitability

Sales growth is one of the most important metrics for evaluating a company’s ability to expand its business. While earnings growth shows profitability, sales growth reflects the raw demand for a company’s products or services.

For position traders, strong sales growth is a key indicator of a company’s long-term potential. Companies consistently growing their sales are likely gaining market share, innovating, or expanding into new markets — all of which support sustainable growth.

The best-performing stocks typically report at least 25% sales growth quarter over quarter over multiple quarters.

Sales growth is the foundation that drives profitability. A company can only increase its earnings over the long term if it continues to grow its revenue. Without sales growth, earnings improvements may be short-lived or based on temporary cost-cutting measures, which are less sustainable.

Even companies that are not yet profitable can attract significant institutional interest if they show strong sales growth. For example, startups or companies in high-growth sectors (like tech or biotech) might not have positive earnings yet but can still generate excitement due to rapidly increasing sales.

Forward Estimates: Spotting Stocks with Future Potential

Institutional investors and analysts don’t rely solely on past performance when evaluating a stock, they also pay close attention to Forward Estimates, which are projections of a company’s future earnings and sales. These estimates provide insight into how a company is expected to perform in the coming quarters or years.

For position traders, forward estimates are critical because the market is forward-looking. Stock prices often move in anticipation of future growth rather than reacting to past results. Tracking upward revisions in forward estimates can help you identify stocks poised for significant gains before they break out.

The stock market is a discounting mechanism, meaning it prices in expectations for the future. Even if a company posts impressive current results, its stock price might not move significantly unless forward estimates suggest continued growth.

Forward estimates are closely tied to analyst upgrades. When a company provides better-than-expected guidance during earnings reports or other announcements, analysts typically adjust their projections higher.

Upward revisions often trigger increased buying activity from institutional investors, as these projections suggest the company is on track to outperform expectations. This influx of demand can push the stock price higher, making upward revisions a key signal for position traders to watch.

Three Weeks Tight: Uncovering Institutional Support

The Three Weeks Tight pattern occurs when a stock’s weekly price action shows minimal movement, with its closing prices staying within a narrow range for three consecutive weeks. This tight price behavior reflects institutional support — large buyers like mutual funds and hedge funds accumulating shares while keeping the stock price stable.

For position traders, spotting this pattern on a weekly chart is a valuable signal. It often indicates that institutional investors are stepping in to support the stock at a specific price level, preventing significant declines and preparing the stock for its next move higher.

Here’s what to look for when scanning weekly charts:

• Narrow trading range: The difference between the weekly high and low should be small for three consecutive weeks.
• Stable closing prices: The closing prices of those three weeks should stay close together, typically within 1%-2% of each other.
• Low volume: Tight price action often occurs on lower-than-average volume, indicating a pause in trading activity as institutions accumulate shares.

The Three Weeks Tight pattern is a powerful signal for uncovering institutional support. When institutions quietly accumulate shares, they prevent the stock from losing momentum.

Whether the pattern occurs during a base or after an advance, it’s a sign of strength and stability. Combine this insight with strong fundamentals and market leadership to find stocks with the best potential for long-term gains.

Near Highs: Monitoring Stocks with Leadership Qualities

Stocks trading near their highs often display leadership characteristics, meaning they outperform the market and show resilience during volatile conditions. These are the stocks investors gravitate toward because they exhibit strength and stability.

During market corrections, weaker stocks tend to drop significantly, often falling far below their previous highs. In contrast, leading stocks generally remain within 25%-35% of their highs, signaling that they are holding up better than the rest of the market.

A stock’s ability to stay close to its highs, even when the broader market is under pressure, reflects several positive factors:

• Strong demand: Institutional buyers are likely to support the stock, preventing it from declining too far.
• Market leadership: These stocks often belong to sectors or industries that are outperforming the market as a whole.
• Resilience: Companies near their highs tend to have strong fundamentals, like growing earnings and sales, that justify investor confidence.

When the market rebounds, these stocks are usually the first to break out and resume their upward trends.

Stocks near their highs often have momentum on their side. Investors are willing to buy at higher prices because they see the stock as a leader with growth potential. This momentum tends to carry over as the market strengthens, allowing these stocks to break out faster than their peers.

For position traders, tracking stocks near their highs is a smart way to identify potential leaders that could lead the next market rally. Keeping an eye on stocks near their highs ensures you’re always focusing on companies with the potential for sustained growth and long-term gains.

Stan Weinstein Stage 2: Catching Stocks in Uptrends

Stan Weinstein’s Stage Analysis is a popular framework for understanding a stock’s price cycle. It divides a stock’s movement into four distinct stages, helping traders determine where a stock is in its trend and when it’s most favorable to buy, hold, or sell.

• Stage 1: Basing phase – The stock moves sideways, with no clear trend. This is often the accumulation phase where smart money starts building positions.
• Stage 2: Advancing phase (uptrend) – The stock breaks out of the basing phase and starts trending higher. This is the ideal time to buy.
• Stage 3: Distribution phase – The stock begins to stall or trade sideways after a prolonged uptrend. Institutions start selling, and the stock may form a top.
• Stage 4: Declining phase (downtrend) – The stock breaks down from Stage 3 and begins a significant downward trend.

Why focus on Stage 2 stocks?

Stage 2 is where momentum thrives – Stocks in Stage 2 have entered an uptrend, often following a breakout from a Stage 1 base. This is the phase where stocks see their largest price gains as institutional investors pile in, driving demand and pushing prices higher.

For position traders, identifying Stage 2 stocks early is the key to catching long-term price advances. When screening for stocks in Stage 2 insist on the following:

1. Breakout above resistance: Look for stocks breaking out of a consolidation phase or Stage 1 base on high volume.
2. Above the 30-week moving average: The stock’s price should be trading above its 30-week MA, with the MA sloping upward.
3. High relative strength: Include stocks with rising RS lines or high RS ratings. These are typically outperforming the market.
4. Volume confirmation: The breakout and subsequent uptrend should occur on above-average volume, signaling strong demand.

Stan Weinstein’s stage analysis is a simple yet powerful framework for identifying stocks with the best potential for large price gains. For position traders, focusing on stocks in Stage 2 ensures you’re trading with the trend and riding the market’s strongest leaders.

Jim Roppel 20/20: Narrowing Down Winners

Jim Roppel is a successful hedge fund manager and a devoted follower of the CANSLIM methodology. Over the years, Roppel has refined his investing strategy to focus on finding high-quality growth stocks with strong fundamentals and leadership characteristics.

Jim Roppel’s “20/20” approach is designed to identify stocks with the greatest potential for significant price gains. Position traders can learn from Roppel’s disciplined approach, which emphasizes the importance of holding stocks through multiple earnings cycles while focusing on companies with consistent growth in earnings and sales.

The 20/20 screen prioritizes stocks that meet specific growth criteria and narrows the focus to the best of the best.

1. 20% Earnings Growth: Look for companies that reported at least 20% Earnings growth quarter over quarter or are projected to grow 20% next quarter. This shows the company is consistently increasing its profitability.
2. 20% Sales Growth: Prioritize companies that reported at least 20% Sales growth quarter over quarter or are projected to grow 20% next quarter. Strong revenue growth confirms there is an increasing demand for the company’s products or services.

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Position traders typically hold stocks through multiple earnings cycles, aiming to capture large price gains over time. Roppel’s 20/20 strategy complements this approach by narrowing the focus to stocks that are:

• Consistently Growing: Companies that deliver strong earnings and sales growth over several quarters are more likely to sustain their uptrends.
• Attracting Institutions: Stocks with robust growth metrics are more likely to be accumulated by institutional investors ass evidenced by a large Up/Down Volume over 1.
• Relative Strength: Institutional accumulation can be easily seen as the Relative Strength (RS) Rating is over 85.

By following this strategy, position traders can build a portfolio of high-quality stocks with the potential for long-term outperformance.

Putting It Together: Building Your Position Trading Strategy

Position Trading combines strong fundamentals with supportive technicals to identify stocks with leadership qualities and long-term growth potential. By focusing on high liquidity, earnings and sales growth, relative strength, and institutional support, you’ll increase your chances of finding the market leaders.

Here’s a recap to build your position trading strategy:

1. Prioritize liquidity to focus on stocks backed by institutions.
2. Screen for strong earnings and sales growth to find fundamentally sound companies.
3. Use relative strength to concentrate on market outperformers.
4. Track leadership characteristics like stocks near highs and tight price action.
5. Identify breakouts and focus on stocks in Stage 2 uptrends.
6. Incorporate forward estimates to anticipate future growth.

By following these steps, you’ll create a disciplined and effective screening approach for position trading. Find leadership stocks and capitalize on long-term price movements supported by institutional accumulation.