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TheStreet Open House

A Horrible Chart to Trade for Wonderful Gains

Stocks in this article: PLUGNEWL

 DELAFIELD, Wis. (Stockpickr) -- The stock market is once again under heavy selling pressure today, with the Dow Jones Industrial Average off by 139 points, the S&P 500 down by 13 points and the tech-heavy Nasdaq trending lower by 32 points.

>>3 Stocks Breaking Out on Big Volume

Despite the weak action in the markets, there's one group of stocks that traders continue to come after with force. That group is what I like to call "horrible charts." These oversold, beaten-down stocks with poor-looking technicals are where all the money is being made right now as large traders chase this group looking for quick rebound moves. This is a theme and pattern in the markets that I think is going to continue to play out, since there are so many candidates for this chart pattern.

Take, for example, the run we've seen in shipping player NewLead Holdings (NEWL) over the last few days. You'll be hard-pressed to find a worse-looking chart then NEWL over the last six months. Things got so bad for this company that last Thursday it announced a 1-for-50 reverse stock split for its common shares so that the company could maintain its compliance with being listed on the Nasdaq. Shares of NEWL are soaring higher today by 80% in a tough tape -- and the stock is up much more than that when you consider that its post-split low was 39 cents per share.

>>5 Rocket Stocks Ready for Blastoff

Horrible charts are in play for various reasons. In many of these names, the short-sellers have overstayed their welcome and pushed these stocks down to absurd levels. Then when the bulls start buying, the smart short-sellers are covering quickly, causing large spikes higher. In addition, many of these stocks have entered extremely oversold territory, and there isn't anyone left willing to sell these stocks down at their depressed levels.

Many traders are unwilling to go near these ugly charts, but that's a foolish way to approach the markets since this theme is trending and working in a tough market where the usual sector trends aren't playing out. This game is all about finding trends and exploiting what's working right in front of you, even if it's something you have avoided in the past. I like to think of it as playing in the sandbox that everyone else on Wall Street is playing in. If nobody is in your sandbox, it's probably time to find another one.

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