Gap-Up & Give-and-Go
Toys R Us appears to be bearing out
the precedent that stocks which gap-up on positive fundamentals often move
higher rather than filling the gap.
On Jan. 4, shares in Toys R Us
(
TOY |
Quote |
Chart |
News |
PowerRating)
exploded at the open, gapping up 21.6% to a new 52-week high. The toy retailer
said that its U.S. same-store sales 3.5% percent for the nine-week period ended
Dec. 30 and sales at its Website more than tripled to $124 million. The company
also said it was on track to meet fiscal Q4 earnings estimates. Analysts at the
time were forecasting on average earnings of $1.21 a share, according to First
Call/Thomson Financial, up from 98 cents in the year-ago quarter.
After that move, the stock
consolidated for a few days, with nice tight price ranges and contracting volume, signs
that profit-taking was not threatening to overwhelm the stock. Then on
Wednesday, the stock moved ahead 1 1/8 to 24 1/8 on a new burst in volume.
In the process, the stock completed a give-and-go
pattern. I learned this chart formation from portfolio manager Kevin
Marder. A give-and-go occurs when a stock shoots out of a consolidation pattern
on heavy volume and advances more than 20% in a matter of days, puts in a pause
for two or three days, then takes off again. You enter the trade when the stock
enters new high ground. As Kevin has pointed out, the lack of established
support makes the give-and-go a high-risk trade, appropriate only for veterans
with a successful record of managing risk and the ability to cut losses quickly.
On the plus side, the winners can produce powerful advances from this
point.Â
My colleague Gary Kaltbaum, who has
conducted extensive research on gap moves, pointed out in our recent interview that stocks that gap up on a blowout earnings announcement or
pre-announcement often outperform over the short-to-intermediate term, assuming
a decent-to-good general market. Gary has found that when a company beats its
number by a wide margin, that event causes analysts to up their estimates
further down the road.
Toys R Us did not pre-announce an
earnings surprise. However, its Jan. 4 announcement of robust sales growth did
trigger analyst upgrades over the next two days.
By the way, Gary will share some of
his gap-trade secrets in a new lesson, which will appear on the TradingMarkets home
page this Saturday.
The top field of all charts in this
commentary uses a logarithmic price scale and displays a 50-day price average in
red. In the second field, a
blue relative strength line represents the displayed security’s price
performance relative to the S&P 500. The third field displays vertical daily
volume bars in black with a 50-day moving average in blue for volume.
All stocks are risky. 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,
you’ll find extensive lessons in the Money
Management area of TradingMarkets’ Stocks Education section.
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