Bull Gaps & Bear Gaps
It’s a gappy market. Priceline.com
became the latest in a series of stocks to gap down severely after making
disappointing news. I look for the stock to head further south. The company
remains highly valued relative to fundamentals at a time when its losing revenue
traction.
Meanwhile, 3Com gapped up sharply,
coming under strong accumulation after posting a much narrower loss than
expected.
Shares in Priceline
(
PCLN |
Quote |
Chart |
News |
PowerRating), the name-your-own-price
Web retailer, dived 7 57/64 to 10 3/4 on 43.2 million shares. The stock usually
trades 4.4 million. Priceline said it expects Q3 revenue of $340 million to $345
million vs. Wall Street forecasts $360 million to $380 million.
For the shorts, there are fewer signs
more bearish than a severe gap-down price move on huge volume, a sign that
institutions are running from a stock. The market has been in no mood to
tolerate fundamental disappointments. Companies that have done so have seen
their shares gap down like Priceline’s did Wednesday. For two precedents, check
out my Sept. 26 Trading
The News.
As a short-seller, I would short if
the stock fell below Wednesday’s session low on active trade. In the event of a
bounce or pullback, I’d stay on the sidelines, then short if the downtrend
resumed. For an introduction to shorting these scenarios, check out my lesson,
Short: Three Patterns For Bears.
On the upside, shares in 3Com
(
COMS |
Quote |
Chart |
News |
PowerRating)
gapped up 3 1/16 to 17 on more than double-average volume. The computer
networking gear maker narrower than expected fiscal first-quarter loss. After
Tuesday’s close, the company reported a Sept. 1 first-quarter loss excluding
extraordinary items of 12 cents a share, trouncing analyst forecasts calling, on
average, for a 33 cent loss, according to First Call/Thomson Financial, which
compiles broker estimates.
The positive signs are adding up:
sharp, gap-up price advance on strong volume, a break above the 50-day moving
average as well as a break above the stock’s mid level of around 16, positive
response to positive news, price strength in the face of a weak market. A
possible pivot point: 19 a share, which provided resistance Aug. 7.
All stocks are speculative. In
any new trade, reduce your risk by limiting your position size and setting a
protective price stop where you will sell your new buy or cover your short in
case the market turns against you. For an introduction to combining price stops
with position sizing, see my lesson,
Risky Business. For further treatment of these and related topics,
check out the Money
Management area of TradingMarkets’ Stocks Education section.