Stocks That Split
You
may have heard about the strategy
of buying stocks right before they split. Some
people call these “split runners.” There are numerous reports you can
subscribe to, email alerts, and even a Wade Cook application — all designed to
take advantage of this process. I’m
here to tell you to watch out! Though
most agree there is a degree of hype that comes with a company announcing a
stock split, actually building a trading method from this needs a few words of
caution and some traditional technical know-how to reduce your margin of risk.
The
announcement of a stock split and the actual event of the split create an
opportunity for two strategies. The first
opportunity is taking advantage of the enthusiasm that hits by setting up in a
position before the actual announcement. Unless
you know of a good source for this type of news, it would be insane trying to
guess. If you do know of a dependable
source, please let me know. The second
opportunity is found within the time before the actual split.
This is where the statistics suggest buying and holding anywhere from
three weeks, 10 days and three days up to the split will seal up some profits.
The idea is solely based on the idea that people will perceive the split
as a positive thing and drive the price up. Analysts
also tend to release positive news about the company around this time, to help
boost sentiment. Â
In
my opinion, using a pure buy-and-hold method to capitalize off splits is not
a good method, especially in a bear market. I’ve
been flipping through the charts of stocks that have split in the last four
months and really haven’t seen much in the way of making this a solid
strategy. However in a bull market the
emotions will run high on positive news and there is ample evidence to support
an entry based on chart patterns and volume.Â
In other words don’t rely on the news of a
stock splitting alone to make a trade.
Before
I go into examples of setups, I’d like to lay out some groundwork for why a
stock splits in the first place. The
split can be 2-for-1, 3-for-2, 3-for-1, or 5-for-1. The “pay date” is
the day before the split, and the “ex-dividend date” is the actual day of
the split. The
occurrence is really a meaningless bookkeeping exercise that changes the value
of nothing, the effects are all psychological. Companies
do this on the advice of Wall Street investment bankers.
When a stock has run up for a year or two, they will split the total
number of shares and price. This is often at the end of their bull run when
cheaper share prices are hoped to attract more buyers.
Though it may be true that stocks that split do so because of their
strength, it’s also true that the only good news is how the herd can get
excited about this. Having a list of
stocks that are going to split on your radar screen may invite some attractive
setups if the conditions are right.Â
This
example with Christopher & Banks Corporation
(
CHBS |
Quote |
Chart |
News |
PowerRating) shows the ideal
pattern for someone using the buy-and-hold-from-three-weeks-out strategy. Ten days
before the actual split volume picks up, the intraday ranges expand, and the
price climbs. The more technically inclined trader might have entered on Jan. 29
when the stock broke out of two tight trading days with high volume. The
stock gapped up the 30th. Notice that on the day of the split a
“Lizard” is formed and it marks the beginning of a down trend. This
would be the ideal point to go short. Â
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This
example with Check Point Software
(
CHKP |
Quote |
Chart |
News |
PowerRating) shows a split happening in the
same time-frame as the example above with CHBS. In contrast, a choppy
chart pattern develops for the three weeks before the split and you would have
been burned using a buy-and-hold strategy. However, there are some setups
here. Notice the increase in volume after the split announcement. An exact entry
point here would have been a difficult call, but for those who like to go
surfing on momentum it was definitely here. An exit would have been made on a
trailing stop. The price action here was too choppy to gauge, and using
the buy and hold would have been a torturous event. Â
Here’s
an example of Krispy Kreme
(
KREM |
Quote |
Chart |
News |
PowerRating) splitting a couple months ago. A
buy-and-hold-for-three-weeks strategy would have turned a profit, but the
pattern points to some entries that would have made the most of the price
action. Notice the increase in volume right after the announcement of the
split. The stock makes a lizard the next day and thrusts upward on the
third day with an expanded range. An ideal exit would have been the fourth day
when the stock failed to make a new high. Again, this maneuver alone would
have been more profitable than the buy-and-hold routine. Â
To
sum it up, using the buy-and-hold method for playing splits this last quarter
would not have been a wise move. In a bull market, every tactic pointing up
has merit, but when the market turns the corner you need to reassess your
strategies. Personally, I wouldn’t even play splits with a buy-and-hold
strategy in a bull market. You’re hoping the statistical odds will be in
your favor by doing that, and not taking advantage of the chart patterns which
will reduce the amount of risk. The same goes for all other strategies that are
bullish in nature. Pullbacks, oscillators, and breakouts take on new
meanings when the bear is in charge. I know this is common sense and
everything is clear in retrospect, but my point is: Stick to your charts and
don’t run wild with strategies like “split runners,” until you’ve done
your homework. Â
Check
out upcoming
splits at TradingMarkets.
Be
careful out there and happy profiting.
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