Try This Strategy For Trading IPOs

  • December 10, 2003
  • Rob Hanna

After
a gap up and big slide down
for most of the day, the market rallied into the close to make it look like it
wasn’t that bad of a day. It was still pretty bad. Today was the third day
of distribution in the last six for the Nasdaq. Leading stocks and recent breakouts
have been awful recently.

Sportsman’s Guide
(
SGDE |
Quote |
Chart |
News |
PowerRating), which I pointed out last
week is one example of a stock that couldn’t hold above its pivot

image src=”https://tradingmarkets.com/media/2003/Hanna/rh121003-10.gif” />

Laserscope
(
LSCP |
Quote |
Chart |
News |
PowerRating) took
a big hit on big volume.

image src=”https://tradingmarkets.com/media/2003/Hanna/rh121003-04.gif” />

Astro-Med
(
ALOT |
Quote |
Chart |
News |
PowerRating) was
another big loser.

image src=”https://tradingmarkets.com/media/2003/Hanna/rh121003-05.gif” />

Mobius
(
MOBI |
Quote |
Chart |
News |
PowerRating), which has had a nice run recently, broke through support
today.

image src=”https://tradingmarkets.com/media/2003/Hanna/rh121003-03.gif” />

The biggest breakdown today
was Network Engines
(
NENG |
Quote |
Chart |
News |
PowerRating), which sold off hard after gapping lower.

image src=”https://tradingmarkets.com/media/2003/Hanna/rh121003-02.gif” />

Time to put out the caution flag and make sure you’re extra selective
and extra vigilant with new purchases until we start seeing some accumulation
by big institutions again. If institutions don’t step up soon, the short
side may be the place where profits are more easily found.

It hasn’t all been
doom and gloom the last two days, though. Check out Ctrip.com
(
CTRP |
Quote |
Chart |
News |
PowerRating). Their
IPO yesterday sure brought back some memories. It was just a few short years
ago when it was commonplace to see an IPO with “.com” in the name
come to market and double in the first day of trading. In fact, if it only doubled,
that was sometimes disappointing. Some IPOs would have a 30-40 point range or
greater on their first day of trading. My broker used to send out warnings of
a “fast market” — boy was that an understatement. A stock
could drop $5 between the time you decided to sell and the time you could punch
in your order. You couldn’t possibly trade in some of these issues if
you weren’t wearing a helmet.

After getting burned on
a few first-day high fliers like Net2Phone and Cybergold, I decided to take
a more conservative approach to my daytrading…I would wait until the 2nd
day to trade any IPO’s. One of my simplest and most profitable strategies
was to look for a breakout of the 1st day’s range, and buy there. Of course
without any significant technical support due to lack of history, I would need
to use either hard stops ($0.75 worked fine) or find some support in the 5-minute
chart and place my stop below that. It was simple but very effective. One day
profits of $5-$10 were very doable. I made some very nice gains in stocks like
Clarent, Bsquare, Numerical Technology, and Digital Think. (No, I don’t
know what happened to any of these companies.)

Ctrip.com (CTRP) spent the
day today consolidating, rather than tacking on another $15 like it might have
four years ago. Trying to trade the strategy I described above these days would
be extremely difficult (if you ever even got a trade to trigger). It’s
not so easy to make big money off of lousy companies anymore. Even so, there
are still ways to make profits trading IPO’s. December is scheduled to
have the most IPO’s we’ve seen in any month for over two years.
The IPO market is coming back to life a little bit. There have been some solid
gainers this year (see LEND, VSTA, IPMT, DTSI, etc.). One resource you may want
to check out with this in mind is Loren Fleckenstien’s course, “How
to Trade Hot IPO’s” in the TM University Section of TradingMarkets.
(Be careful, though. I suspect it’s quite dusty and could make you sneeze.)

If the market does decide
to perk up and make another run higher, many of the recent hot IPO’s could
be among the leaders, so don’t ignore them. And if they do start doubling
again on the 1st day, and you insist on trading them, don’t forget your
helmet.

Best of luck with your trading,

Rob Hanna

robhanna@rcn.com