Great Article from breiefing.com
DAYTRADER: One mistake that many traders make is that they leave the court before the game has ended. They assume that because a stock has already run-up sharply, the upside is over, and because the stock has come crashing back to earth, there is no more downside profit potential. This is generally not the case. A stock accustomed to trading 50,000 shares per day that rockets 100% on volume of 10 million shares will not be the same again for quite some time. On a highflying, momentum stock, the upside typically lasts for the day of the news and a small portion of the next day. After that, the stock usually begins to go intro free-fall, losing 20% to 30% per day over two consecutive trading sessions. As we have mentioned in this column several times before, traders are on the prowl for highly-publicized stocks that may have had a big run-up and sharp sell-off. Their goal is to find an issue that is likely to have a large number of short-sellers in it and be ready to pounce on the first sign that the stock may be firming. How does this work? The trader sits back waiting for the stock to show some sign of a bottom. For someone using Level II quotes that indication may come when market makers begin to join the bid. To others, it may simply be when the bid/ask spread begins to narrow. Typically, when a stock is still being sold off, the market makers keep the spread wide by continuously dropping the bid. Once that bid begins to hold and the offer starts to move higher, traders will begin to test the water. Within a matter of minutes, a stock can be lifted out of negative territory. A short-covering rally can easily carry an issue up 20% for the session and 35%-45% off of its intraday low, allowing daytraders to make a mint off a previously busted stock. But one should remember, these are daytraders, they are not buying these stocks on fundamentals. As a result, when it appears the short-squeeze is over and the temporary reversal in momentum to the upside has ended, they begin to unload, which allows traders who shorted the stock into the rally to get their beaks wet. Obviously, the tough part of this process is being able to time the trade. That takes experience. But for those of you who were quick to abandon a stock after its initial moves, you are now at least aware of the opportunity. |
