Jea Yu has been involved with the equities markets for over 10-years. He specializes with intraday trading in the U.S. equities and futures markets. To receive a free 7 day trial to Jea Yu's Underground Trading Pit, click here or call 888.484.8220, ext. 1.

When a stock gaps down multiple points on news, like an earnings warning, we call them "dumpers." Many traders try to time the bottom on dumpers and catch the bounce. We have a more formatted way to play the bounces on these dumpers. The first thing we do is wait for the 3-minute lower Bollinger bands to catch down to the stock price. Once the 3-min lower Bollinger band is broken then we use the 1-minute 20-band stochastics bounces to step in long. The initial target on the trade is the 3-minute 5-period moving average. Once the 3-min 5-period moving average is broken, then we trail stop the 3-minute 5-period moving average on the way up to the 3-minute 15-period moving average depending how the NQ’s are trading. We also pare out profits as the 1 minute stochastics breaks through the 80 band on the oscillations.

We played (ADTN | Quote | Chart | News | PowerRating) dumper off the open on 3/10/06. ADTN gapped down on earnings warning. We saw the 1-minute stochastics crossing up through the 30-band in a mini-pup formation. We took longs at 25.60 at 9:37am for a tightening to the 3-minute 5 target at 26. We pared 26 overshoots and trailed the 3-minute 5-period moving average until the 1-minute stochastics completed its full oscillation to exit at 26.35, out + .75

Remember that first you need to base that lower Bollinger band. Once that is based, it becomes your stop as you target the 5-period moving average. Once that is based, it becomes your stop as you target the 15-period moving average. In the case of ADTN, the noodles were very weak and selling off, so we locked the 1-minute oscillation through 80 band into the buyers.

Good trading gang!

Jea Yu