Last week we discussed how to evaluate whether or not a stock was a good candidate for a sell short. Learning to recognize when there is
very limited point gain potential can help you avoid poor picks. Last week's stock had limited downside potential and was not an ideal sell short.
Remember: regardless of whether you are buying long or selling short, you must
always use a bracketed controlled order and never an "at market order" or a mere "limit order" as these kinds of orders do not give you control over your entry price.
Today we are going to talk about gaps. We are currently in a Platform Market Condition.
Gaps are common occurrences during a Platform Market Condition and if you understand why they occur, then you will be able to enjoy the profits from gaps. You will also avoid entering a stock that is about to gap in the opposite direction due to
lack of good point potential, and you will be able to know what the stock is likely to do after it gaps.
Today we are looking at SHLY.
Chart 1First, you should notice that this is a candlestick chart. It is far easier to see subtle patterns with candlesticks than bar charts. To understand this chart and why it has gapped twice is exposed in the candlesticks.
The sideways action from June to October is a platform. Platforms tend to gap especially on earnings news that is good. The reason why is because institutional investors, the dominant buyers in our automated markets have been buying up the stock quietly without anyone noticing.
You can tell when the institutional investors are moving in because they used controlled bracketed orders that hold price fairly level, creating the platform as they buy in incrementally. These are the wisest of all buyers in the market. They can control how price behaves. They may want to own millions of shares of stock, but they must buy in slowly, with a controlled, bracketed order. This keeps price within a fairly tight range until these giant funds have all the shares they want to own.
Then they allow the "news" to leak out among the fundsmanagers, pro traders, etc. that they accumulated a stock. This causes a chain reaction among the high frequency trading firms, pro traders, smaller funds, and eventually you, the retail trader. The order flow switches rapidly from quiet accumulation to speculative trading and high frequency trading activity. Surges of volume confirm the heavy non-controlled order trading of these groups. These groups use at market orders and limit orders rather than a controlled bracketed order. This causes price to gap and surge.
Chart 2During the consolidations notice that TTQA turns green, signaling the dominance of large lot trading activity and more accumulation.
Chart 3 Next, you see that the stock moves into a sideways pattern and that TTQA green bars fade. The accumulation is over and the institutions are waiting on news. Meanwhile, retail traders have gotten the notion that the markets are due for a "correction". The hype filters around retail trader blog sites and guru newsletters. Small lots rush to sell short the news of Egypt turns the market momentarily down.Unfortunately, these small lot sellers have neglected to do the analysis you learned in our first lesson: how much potential point gain is there to the downside? Not much. Support is nearby and there is no confirmation of the downside action, either from charts or TT Market Condition Explorers.
As the stock dips on small lot sell short trading, a few institutions buy more causing the pre gap rise in volume on a small white candle.
Chart 4 The stock gaps on earnings news once again.
This is a breakaway running gap. The support level for the gap is nearby at the highs of the sideways action. What is likely for this week for this stock?
Profit taking is likely by short-term large lot traders. The volume exhaustion pattern is a warning sign. However, this kind of gap tends to be a continuation pattern. The stock will likely form another long sideways pattern up and down as large lot profit takers move out and small lots buy in.
Trade wisely,
Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock Partner
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