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The Gainer Play

by Shawn Wolff January 2005

 


With earnings season underway, we have been running into a type of daytrading play I call the “Gainer”. Recent gainer plays have included INSP, SGTL, IMCL, ERTS, and FLEX to name a few. These are news stocks that gap positively on strong volume. They start the day off with a strong push of fresh momentum, and usually offer some of the best potential a daytrader can hope for. The trick though is getting on the right side of a gainer. How do you know when to short the gap, and when to go long on a pullback?

The first thing I do is try to get on the right side of the market. Before I consider any trade, I want to get a feel for what the market may be doing. Ideally I want to point my trades in the direction of the market. I want the market to help me out. The tide generally floats all boats, so I have to keep an eye on market direction and realize that long positions will do better in a positive, up-trending market, and gainers will be held down by a weak market. So I start the day off reviewing the market trend, watching futures, and noting any general news that might affect the general market bias.

Next, I will review the recent pattern of action we have seen in previous gainers. I am generally interested in how the gainers have been behaving in the first two hours of the market, because that is the most predictable, highest potential time for daytrades. What I want to know is “when” have buyers been moving in. Have they been waiting for pullbacks? If so, how much have the pullbacks been on average? Are they moving in early? Are they selling good news, or creating good follow-through momentum? Is there any uniformity in the action? Are their patterns of behaviour consistent and predictable?

Finally I want to narrow down the best picks for the day. Pre-market I am generally scanning for news stocks. If a stock starts the day off with momentum, that momentum almost always follows through after open, so I chose my picks early, according to the gaps and volume. If you don’t have a news service or scanner, try this handy link from the Nasdaq site. http://dynamic.nasdaq.com/dynamic/premarketma.stm It gives you the Nasdaqs most active, most advanced, and most declined stocks pre-market.

What I look for is price movement and volume. I need to see both to indicate strong momentum. A large gap without volume means no one cares. The gap was “placed” there, rather than “pushed” there, and that is going to make follow-through momentum unpredictable. Two people jumping up and down excitedly isn’t going to have the same effect that an exuberant massive crowd has. There is no way to know if the enthusiasm of those two lonely traders will become contagious or not. So its not a predictable trade.

On the other hand a large but apathetic crowd, showing lots of volume but no real gap, does not really show me much playable predictable momentum either. We need lots of players to provide liquidity, and we need an obvious enthusiastic bias, to start the pendulum swinging and create predictable momentum.

Once I have a few good picks, I need to assess the individual dynamics of each trade. For a broader perspective on where the stock has been coming from and might be going, I will look over a chart of the previous 52 weeks. This will show me any obvious support or resistance barriers, and give me an idea of what the expectations were leading up to the news.

Next, I want to go over the news itself. Does the news justify the gap? If XYZZ gapped up 4 points with news that they had appointed a new CEO fresh out of business school it would be a flaming short.
But if it were gapping up 4 pts with news that a new customer in China had ordered 6 billion semiconductors, then that 4 point gap would be very reasonable, and you could anticipate another 4 pts after the open.

It takes some experience to know which stories are worth more than others, and the potential of the trade at the open, or more precisely off the first bottom. Earnings news takes a world of experience to understand, so you have to spend some time educating yourself, and tracking reactions to different news.

Finally, pre-market I want to track the gaps. Are they closing, or trending down as we near open? Are they holding strong or increasing as the market opens? This is going to tell you a lot about how eager buyers are and how much impulse there is for profit-taking. A stock that is opening at its pre-market high, is more likely to get early buying. A gainer that is rapidly losing its gap as it nears open, is likely in for a pullback after the market opens.

Track the pre-market highs and lows carefully, because they often act as support or resistance after the market opens as well. Often the first reactions are the strongest. And if you see those pre-market highs or lows break after open, its often a good trade opportunity, in whichever direction it breaks.

These plays can be some of the trickiest, but if you can get a handle on all of these variables, gainers can offer some of the best trading opportunities for daytraders.

 

 

 

 
   
   

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