Return of the Cheapies

I love it when a plan comes together. After last week's article on trading cheap stocks, I received more email than almost any other article, from traders who were indeed turning their attention toward "cheapies" again.

The most common question: How do I determine which cheapies to play?

The first thing I look for is news. I monitor news scanners, CNBC and other chat rooms looking for news on small stocks that will have a positive and immediate impact on the company's bottom line. I don't care about great news that will have an impact years down the road. I am a student of the news. Over the years I have studied and tracked what type of news events moves stocks and what type of markets they move best in.

News can be tricky; sometimes the cure for cancer will barely move a stock, while other times an announcement for a new flavor of toothpaste will send it skyrocketing. The only way to get good at determining how a stock will react to certain types of news events is to constantly monitor and track them.

I pick the five best news events I can find, then check to ensure the volume of shares traded the previous day is greater than 2 million shares. I make exceptions to this, pending the quality of the news event or the volatility in the preopen action. Sometimes I find these stocks simply by looking at daytrader talk in the chats. If the interest is strong enough, I will throw it up on my screen to watch the preopen action. If a stock is dead before the market opens, it is likely to be dead after the bell, so I take it off the screen.

Here are a few good examples of cheapies in play last week.

As you can see from the Nasdaq chart above, the general trend was up. In last week's article, I discussed several cheapie plays while the market was in a decline that day. The overall preopen showed upward momentum, leading me to believe it would be a positive day. Keep this in mind, as it slightly altered my entry and exit points.

At Home(ATHM Quote - Cramer on ATHM - Stock Picks) caught my eye because of news that the company had renegotiated its optical-fiber capacity contract with AT&T in a new deal that provided the company with $85 million in cash.

After reading the news, I put it up on my screen. Just prior to the open, I noticed an increase in the buying pressure and the proper entry was at the open. You can see from the At Home chart above that it opened at $1.90 and climbed straight up from the open without so much as a hiccup until 9:58 a.m. EDT, when the buying slowed, selling came in and the momentum abruptly changed direction when it hit $2.46 for an easy 0.50-point gain. A 0.50-point gain may not seem like much, but as I said in last week's article, I play 1,000 shares minimum on cheapies. I will take a $500 profit on a trade any day of the week.

Acclaim Entertainment(AKLM Quote - Cramer on AKLM - Stock Picks) was a bit different. It was still swinging a bit over some old news about the company retiring some old debt, but daytraders remained interested for some reason. It caught my attention because it was still being discussed in the chats. I watched the preopen and it also showed a good amount of upward momentum just prior to the open. Because the news was neither fresh nor all that good, I was a bit concerned. However, the momentum picked up just prior to the open and because I determined the general market was in an uptrend due to the preopen action, I decided it was worth a shot.

Take a look at the Acclaim chart above. You can see it opened at $3.30, dipped a bit to $3.27, then took off. The proper entry on this was not at the open, but at the first uptick due to the weaker news. The stock faltered a bit at 10:23 a.m. EDT when it hit $3.69, but I elected to stay in the trade due to the overall upward momentum of the general market. At 10:50 a.m. EDT the stock hit $3.98 and changed direction. Again I elected to stay in the trade as the general market was still climbing. I was wrong. Three minutes later, I noticed many stocks on my screen starting to sell, signaling an exit point at $3.90. Not bad -- a little under a 0.60-point gain with 1000 shares.

Keep an eye on the cheapies over the next few weeks; I have a feeling they are going to be in play for a while as many of the battered traders return to the market with smaller portfolios.