Keep Up Your Contrarian Guard
Over the past several weeks, the
market has served up a spate of gap-down short candidates which followed through
to downside with remarkable consistency. Perhaps too consistently.
To my eye, the gap-down short is
starting to look a little obvious. And once something looks obvious, watch out.
What worked yesterday may be ripe for a contrarian play today.
Now don’t misunderstand me. As a
momentum trader, I would never go long a stock meeting my criteria for a
short. But the tactic has paid off almost repetitiously of late. That
raises the odds that some of the past gap-down stocks are becoming over-extended
and ripe for reversal.
If you’re still short some of these
stocks, the time may have come to take some money off the table or tighten
your protective stops. If you short new gap-downs in the future, stay primed for
a reversal and alert to taking a short-term profit. Â
I’ve pointed out setups
in Eastman Kodak
(
EK |
Quote |
Chart |
News |
PowerRating), Priceline.com
(
PCLN |
Quote |
Chart |
News |
PowerRating), Apple Computer
(
AAPL |
Quote |
Chart |
News |
PowerRating),
MedImmune
(
MEDI |
Quote |
Chart |
News |
PowerRating), Xerox
(
XRX |
Quote |
Chart |
News |
PowerRating), Razorfish
(
RAZF |
Quote |
Chart |
News |
PowerRating), Yahoo
(
YHOO |
Quote |
Chart |
News |
PowerRating)
and Lucent
(
LU |
Quote |
Chart |
News |
PowerRating). I’ve also cited the precedent of Intel
(
INTC |
Quote |
Chart |
News |
PowerRating).
All save Lucent generated a subsequent
short signal. Of those eight stocks, seven headed lower on the signal. The
exception, MedImmune
(
MEDI |
Quote |
Chart |
News |
PowerRating) has failed to break decisively, and came up
Monday off its lows.
Xerox
(
XRX |
Quote |
Chart |
News |
PowerRating) tumbled 2 11/16 to 7
3/4 on concerns of a possible cash crunch at the company, following through on
the gap-down move on Oct. 3. Afternoon bottom feeding helped lift the stock off
the day’s lows.
Intel slid 4 11/16 to 35 11/16 along
with Advanced Micro Devices
(
AMD |
Quote |
Chart |
News |
PowerRating) as analyst raised the possibility of a
price war between the competing chipmakers.
Â
Some of the other gap-down shorts
which have rewarded bears over the past week now are trying to come off their
lows.
All stocks, of course, 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.