Read Larry Connors' blog – Short Term Trading Strategies
When a company warns or misses earnings guidance, it usually results in a gap down on selling. The question always arises as to whether one should buy for a bounce or short for a further decline. We have a solid system to play these dumpers. It involves the 1 minute and 3 minute charts with 5/15 period simple moving averages and stochastics. Despite human nature to jump in right at the opening bell, the safest play is to wait out the first 10-15minutes until the 3 min 5 period moving average ‘catches’ down closer to the stock’s price. Once the moving average gets near the stock price, one of two things will happen. Either the stock will bounce through the 3 minute 5 period ma and base with 2 or more candles and work a bounce to the 15 period moving average, or it will test the 3 minute 5 period ma and flatly REJECT off that level. When the rejection forms, the 3 minute stochatics will triggers a mini inverse pup and the 1 minute stochastics will SLIP. Mini pups are when the lead %d stochastics stalls on the rise as the laggard %dslow stochastics continues to rise to form a wedge like breakout and vice verse on breakdowns. This 1 min slip is the trigger to go short.
This was the case when we played (RHAT | Quote | Chart | News | PowerRating) 9/27/06. RHAT gapped down on weak earnings. We waited for the 3 minute 5 period ma to catch down on RHAT which was sitting near the 20.72 level. We stepped in SHORT at 20.60 with a trail stop at 20.77 at 9:40am as the 1 minute stochastics slipped and formed a 3 minute mini inverse pup lean. RHAT panicked hard to sell off through 20 where we locked the shorts, out + .60
As we get closer to earnings season, this setup is a very nice profit maker on any companies that gap down.
Good trading gang!
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.
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