When I first started trading, patterns would repeat over and over again for months on end. As time passed, however, these patterns started to change quicker and quicker until it seemed as if every other day a new pattern was hot and the one that worked the day before no longer did.
That's why it's very refreshing to see the "cheapie" pattern consistently repeat over and over again for the past three or four weeks. Everyday I expect the pattern to stop, but "cheapies" just keep plugging along like the Energizer Bunny.
On the morning of June 25, I was again searching for cheapies to be in play. The premarket looked strong. I saw a good number of stocks on my screen starting to show signs of gapping up (opening higher than they closed the previous day).
As you can see from the Nasdaq
chart above, the premarket action told the story, and the Nasdaq did indeed gap up. Many times the cheapies don't act in a rational manner in tune with the market. They have been running up from the open lately, regardless of the action of the general market. The risk has been minimal -- by buying the first upticks just after the open, the downside has been minimal. Here is an example.
I was watching
Acxiom(ACXM Quote - Cramer on ACXM - Stock Picks), more out of curiosity and tracking than with an intent to trade, due to a recent significant earnings warning. The premarket action for some reason showed an increase in upward momentum just prior to the open. For a split second I considered buying on the first uptick due to this action and the positive premarket action of the overall market, but elected to not enter the trade because of the earning news.
In spite of this news, as you can see from the chart, Acxiom still climbed from the opening price of $10.51 to a high of $11.86, representing a 1.35-point climb, which I missed. This is a perfect example of the low-risk factor built into these types of plays recently. Even on bad news, the downside has been minimal just after the first low at the open. Had the news been any less damaging, it would have climbed even more and I would have played it.
Level 3(LVLT Quote - Cramer on LVLT - Stock Picks), is another example of a cheapie stock going against the normal trend. The premarket action looked weak the morning of June 26.
As you can see, again the premarket action told the correct story, at least for the open, gapping down for the day.
I was watching Level 3 intently, due to great news released the day before concerning a new agreement to provide its CrossRoads broadband Internet access service to
EarthLink(ELNK Quote - Cramer on ELNK - Stock Picks). This is the kind of news I like, and because of this, combined with the trend of cheapies with news running up from the open, I decided to play.
As you can see from the Level 3 chart above, it opened at $5.04, dipped to $4.90, then sprang to a high of $5.60. I exited on the first peak at 9:46 EDT, when it hit $5.50, for a bit less than a half-point profit. Again, this was contrary to the general movement of the market, which gapped down.
At the same time, I was watching
Exodus(EXDS Quote - Cramer on EXDS - Stock Picks), which was also showing positive premarket action. This time, there was no great news, just that it was recovering from a previous earnings release. Apparently, traders thought it had suffered enough the last week. Keeping in mind the trend of cheapies not dropping too much on the first swing down, I decided to play it along with Level 3.
As you can see from the Exodus chart above, all these factors came together. After opening at $2.11, Exodus dipped to a low of $2.04, then climbed to a high of $2.42 for a quick 0.30-point gain. Not much of a gain, but considering 1000 shares is my minimum on these kinds of stocks, not a bad profit.
These are three great examples of how traders who are not familiar with playing the cheapies can misinterpret them. By tracking and knowing what they will do a good percentage of the time, I was able to exploit these stocks to the fullest, while many other traders were slightly behind the power curve.
It isn't rocket science, only a matter of watching, tracking and recognizing patterns that are repeating. Keep an eye on the cheapies as they continue to provide excellent opportunities for those who track them. Happy hunting!
Ken Wolff
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