Ken Wolff
This column was originally published on RealMoney on July 12, 2007 at 8:00 a.m. ET. It's being republished as a bonus for TheStreet.com University readers. For more information about subscribing to RealMoney, please click here.
Thursday we saw Penson Worldwide (PNSN Quote - Cramer on PNSN - Stock Picks) drop over 20% after cutting its earnings forecast. This is what I call a "Dumper Play." We might be seeing a lot more of these as we head into earnings season, so let's talk about them. First, what is a Dumper? Dumper is the term I use to describe stocks that are down 20% or more overnight because of bad news. Take the previous day's closing price
and multiply it by .80. That gives you the Dumper price.
Why 20%? I think we are conditioned as consumers to act at -20% levels. A typical sale price starts around -20%, so that is where we start to perceive a bargain. If you see 10% off, it's more of a bonus, not really a "sale." But 20% off, or even better, 30% off, those are great sales. Once you get to 50% off, though, you have to be careful. Those are either super deals or junk left over that no one else wants.
This thinking is similar to the way that Dumper plays work. Those typical sale percentages also correlate closely to Fibonacci percentages, which are 0%, 23.6%, 38.2%, 50%, 61.8%, 76.4%, and 100%.
Since we are planning on reselling our "sales item," we need to be sure that we are buying something desirable, not something we personally perceive as a good deal. So, I look at these percentages as "lookout points" for support.
Around -20%, counter-reactions start to become predictable. But like any daytrade, we first look for setups, then we need to see confirmation in the tape.
If a stock is only down 10% or 15%, it's not quite as predictable as a real Dumper, which will have what I call the "Oh, my God, look at that!" factor, where it attracts attention, like a train wreck. The counter-reaction is only going to be predictable if a lot of people are watching and being tempted, so you need a large drop and active volume.
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