Sensor Short Circuits
One way to zero in on a potential
short is to look for sharp weakness in a stock on a big up day in the general
market. Example: Sensormatic Electronics.
maker of closed-circuit television systems and anti-theft tags for retailers,
gapped down hard Tuesday after the company issued earnings guidance of 6 to 7
cents a share for the fiscal third quarter vs. Thomson Financial/First Call’s
consensus estimate of 21 cents.
The stock has produced a gap-down
short, a setup that I describe in my special report, “Shorting Down
Gaps” in the Special Reports section of the Galleria. Gaps on major
earnings news often provide one of the highest probability trades, a subject
that Gary Kaltbaum and I will cover in detail when we go on the road with our
all-day seminars on intermediate-term momentum trading in May and June. By the way, Gary will be on the TradersWorld message boards Thursday April 19th at 8:00 ET. So be sure to gang up on him with your intermediate-term momentum questions!
The day’s big percentage and dollar
gains were largely confined to beaten-down stocks. One sound-looking base
formation belongs to International Game Technology
PowerRating), which gapped up
4.2%% on healthy volume. The move followed through on the prior session’s gain,
which brought the stock above recent resistance along the 50-day moving average.
The stock also has cleared its mid level of around 51 1/4, passing another test
for overhead supply.
One of my guidelines is not to buy
stocks until they have retraced at least half of the loss of their corrections.
Buy earlier, and you run the risk of seeing your stock’s share price fall as
overhead supply comes to market. Overhead supply represents shares in
the hands of shareholders who bought at higher prices. These share
holders — so-called weak holders — tend to sell into rallies to end their
unhappy experience in the stock. For that reason, I generally insist that my
watch list stocks are trading above their mid levels before looking for entries. To find a stock’s mid level,
sum the pre-correction high and the post-correction low, then divide the
result by 2.Â
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.