Playing Bad News
I
generally don’t like to fade markets. I prefer everything move in the direction
of my trade: technicals, fundamentals and the story.
By
those requirements, Best Buy
(
BBY |
Quote |
Chart |
News |
PowerRating) makes a possible gap-down short.Â
The stock sold off hard Thursday after the consumer electronics retailer warned
lowered its profit outlook. Best Buy blamed a slowing economy and increased
competition.
The stock gapped
down Thursday, closing down 20 5/16 to 32 1/16 on 10 times its usual trade.
Shares were already trading below their 200- and 50-day moving averages, and
they closed in the lower half of the day’s trading range. And the move came on
negative news. All requirements of the gap-down short. For more information on
this setups, see my lesson Shorting
Down Gaps.Â
There are two basic ideas
behind the gap-down short. First, the stock has subjected shareholders to
extreme punishment, placing them under pressure to continue for the exits in
subsequent sessions. Second, there’s no rescue in sight. The stock closes in the
bottom half of the day’s trading range, the lower the better.Â
Don’t skimp on any of these
requirements, including the close in the lower part of the range. For contrast,
look at Lands’ End
(
LE |
Quote |
Chart |
News |
PowerRating), the retailer of preppy casual clothing. The company reported a 50%
decline in Q3 earnings. Shares fell but garnered enough support to close in the
upper half of the day’s range.
All stocks are risky. On
any new trade, be sure to limit your position size and set a protective price
stop where you will sell your buy or cover your short to protect yourself
against severe losses. For an introduction to combining price stops with
position sizing, see my lesson,
Risky Business.