Xerox Confesses, Gets Punished
Continuing our confessional season
theme, Xerox on Tuesday became the latest stock to gap down to new lows after
issuing an earnings warning.Â
After Monday’s close, Xerox
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warned that it expected to report a loss of 15 to 20 cents a share for the third
quarter. That compares to a profit of 12 cents according to analysts surveyed by
First Call/Thomson Financial. This represents the fourth quarter in the past
five in which the Stamford, Conn.-based company has come out with a
warning.Â
Punishment was swift. Xerox shed more
than 25% of its market value Tuesday on volume of 40.3 million shares, six times
its usual trade.
Like my other past gap-down short
candidates (Intel
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displays a surplus of bearish characteristics:
1. Breaking below support (see Point
B in above chart).
2. Trading below intermediate- and
long-term moving averages.
3. Massive desertion by institutional
money, as evidenced by heavy volume.
4. Further deterioration after the
gap-down open.
5. Close near the bottom of the day’s
range.
As you can see from the stock’s chart,
Xerox has been in a long-term downtrend. That’s another plus for the short
seller. Trends tend to persist. And Xerox has punctuated its downward path with
high-volume gap-down price moves.Â
Notice also the September 15 advancing
spike on heavy volume, which occurred on rumors that Xerox was a takeover
target. (See Point A in chart.) This raised
the average shareholder cost basis, increasing the pain of the subsequent
markdown. These buyers obviously cannot be happy now. So they add to the burden
of overhead supply encumbering this stock.
The key to playing these gap-down
moves is to sidestep the likely upside retracement, then short as the move
appears to stall. For short-selling patterns, see my
lesson,
Short: Three Patterns for Bears.
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 a mother lode of lessons in the Money
Management area of TradingMarkets’ Stocks Education section.