Following the Crowd on SanDisk

So now that we've described yesterday's news, which is never profitable tomorrow, let's create some "If..., then...." hypotheses on SanDisk.

First, remember that $45 "churning" level? That's where significant emotional/financial commitment lies. Those who bought around $45 are profitable ... and happy. The stock is moving in their favor, and a 15% gain isn't enough to prompt them to sell ... yet!

1. If aggressive buying drives the stock up another several points, then the $45 crowd will probably start taking profits, thus halting the uptrend.

2. On the other hand, if supply so outweighs demand that the price begins trading down to $45, then the crowd will become nervous. Many folks sitting on paper profits will be mad because they didn't sell at $52.

3. If even more supply pushes the price down to around $43, then many folks with a $45 basis will rush to cut their losses and sell. They won't buy more because panicky crowds don't do that. Significantly, those who use stops will probably have put them right around $43. So a decline to this level is likely to trigger stops, thus exacerbating the price decline. The stock will then fall further as more and more stockholders watch their paper profits dry up and become losses. They'll sell in frustration, because that's what crowds do!

4. With earnings due to be announced on Oct. 20, buying pressure should continue to outweigh selling pressure for the next couple of weeks as the crowd grows increasingly enthusiastic about the company's prospects. After all, the strength of SanDisk Tuesday, relative to the broad-based afternoon selloff, indicates solid demand for this stock. If the price continues to advance between now and earnings, then many in the crowd will likely sell, no matter how good earnings are. After such a prolonged uptrend, most folks will already own the stock. With no one left to buy, the demand dries up and the uptrend ends.

That is my raw analysis of the SanDisk crowd. The main limitation (and advantage) of this method of analysis is that the crowd constantly changes each trading day. So my "if..., then...." hypotheses must change accordingly. And that's a good thing. Show me a trader who fails to alter a hypothesis in light of new data and I'll show you a trader that takes big losses.

Hope this helps those of you who are technically challenged.

Be careful out there.

P.S. from TheStreet.com Editor-in-Chief, Dave Morrow:
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