Seven Rules For Trading Low-Priced Momentum Stocks
First,
let me apologize for a mistake I made in
Monday’s column. I
indicated that Monday was an accumulation day on the Nasdaq. In fact, volume
came in lighter than last Friday and so it did not count as an accumulation day.
I’m not sure if the problem was with my data or my eyes, but things seem to be
working properly now. Not only was Monday NOT an
accumulation day, but on Tuesday we saw another day of distribution. Price and
volume action in the major indices continue to be horrid. Today’s mixed returns
all came on lower volume. On a positive note, breakouts have been more abundant
this week than I’ve seen in a while, and so far many of them have held up. Some
institutional buying could go a long way in helping these breakouts follow
through in a meaningful way. Until I start seeing some accumulation (and not
just mirages like Monday) I will remain cautious.
CNBC lately has been doing a
lot of talking about low-priced momentum stocks.
(And adding to the momentum as they mention them.) In fact, there have been some
very notable moves recently. Just today there were at least 5 Nasdaq stocks that
rose over 50% intraday, including
(
CLWT |
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PowerRating),
(
FMDAY |
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(
TISA |
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PowerRating),
(
EURO |
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and
(
RFIL |
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PowerRating).
(
MAMA |
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PowerRating) and
(
DAGM |
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PowerRating) also made incredible moves over the
last two days. (See
Chris Tyler’s article from yesterday regarding a potential MAMA trade.)
The most amazing thing about
some of these stocks is the number of shares they are trading. MAMA, for
instance, traded over 63 million shares both yesterday and today. It only has
about 6.3 million shares outstanding. The average share changed hands over 10
times in one day. When that happens, you effectively have no long-term investors
that will support the stock and buy more if it starts sliding.
Consider the mindset of any
long time holders of MAMA.
If I happen to be a long-time
shareholder and I see my stock go up 300%-400% or so in two days, guess what I’m
doing? Selling…at least most of it. Those who have held this stock for a long
time and didn’t sell yesterday or today are likely still holding because they’re
waiting for it to stop going up before they sell. Most shareholders that have
not held for a long time probably bought the stock in the last two days. If the
price starts falling, guess what they’re going to do? Sell (and fast).
Traders can make some nice
returns in stocks like these very fast. If you have the desire, the means, and
the skill to play with them, then go ahead. Just make sure you have a game plan
going in.
Here are a few things I
would consider:
-
These kind of stocks
MUST be purchased using technical pattern
setups.You need to give yourself some kind of an edge, even if it is a
1-minute chart you are looking at. -
I would definitely be careful
about trading these huge gaps up in the first few minutes of the day. I would
give it AT LEAST 10-15 minutes before looking for
an entry. Normally more like 20-30 minutes. -
If you’re in the red going
into the close…sell it. (Wait for the next one to come along.) -
If you’re in the black going
into the close…sell at least a good portion of it. (Who knows which way it
may gap tomorrow?) -
Don’t bet too big. The
volatility may drive you insane. -
However fast a stock moves
up, it can come down even faster. Know where your stop is ahead of time, allow
for a significant amount of slippage, and don’t hesitate to sell if it is hit. -
If you still want to play in
these kind of stocks, all you need to do is run a quick scan either just
before or a little after the open and look for the stocks that are up the
highest percentage. You’ll know pretty quickly if there are any big gappers
that may qualify.
Best of luck with your trading
(especially if this is your game),
Rob