Last week the
dropped like a high-speed racer catching a ski tip on the first flag at the top of the hill and falling dramatically -- fast and erratically.
Take a look at the Nasdaq chart above. You can see that the majority of the momentum during the slide from 1933.62 on Aug. 27 to 1777.62 on Aug. 30 was explosive with tiny, brief upward rallies. Although this type of momentum is tricky to play, it still creates enormous opportunity for momentum traders.
On Aug. 31, I was watching
during the premarket because late on Aug. 30, the company reported earnings generally in line with expectations, but warned that its first-quarter results might be lower than expected.
Generally, this is the type of news that I like in a dumper stock: not too devastating. Normally I would have watched this for the first bottom the next day and bought the bounce, but during the premarket action, it started to show signs of a "multibottom" dumper.
During the premarket it didn't hold $45.00, a critical support level, and rallies were weak. Plus, just prior to the open, most traders were selling. In addition, many stocks were gapping down, which made me change my plan from buying the first bottom to shorting at the open.
Take a look at the COCO chart below. You can see that it closed on Aug. 30 at $52.85 and gapped down $8.29, opening on Aug. 31 at $44.56.
I entered a short position at the open at $44.65 during the short climb to $44.94, then it dropped like a rock. I watched the overall market, as well as the buying and selling on COCO as it dropped.
It made four bottoms on the way down and I covered my short position on the fifth bottom at 10:15 EDT when the selling dried up, buying got stronger and the majority of the stocks on my screen started to climb. I covered at $41.00 for a $3.65 profit after it bounced off of $40.60.
Although I felt it would continue lower, I was a bit spooked by the strength of the buying at 10:15 EDT. It was not strong enough for me to go long at this point, but take a look at the chart. You can see after my exit, it climbed slowly to a high of $42.99, then dropped off to a low of $37.51, and based sideways for the next hour. This was the place to go long. It was well below a 20% drop, showed classic signs of a bottom and the majority of the stocks on my screen started to rally.
After seeing classic signs of a "multibottom" dumper during the premarket, I changed my trading tactic from buying at the first bottom to shorting at the open. A fairly radical shift in methods, but effective. The premarket action is by far the most valuable tool traders have at their disposal. If you are not watching it and factoring in what it is telling you, you're missing half the story and destined to be one step behind other traders.
Ken Wolff is founder and chief executive officer of Paradise, Calif.-based MTrader.com, a daytrading and swingtrading educational Web site. This column is intended to provide general information about momentum trading. TheStreet.com has no affiliation with MTrader.com, nor do we necessarily endorse momentum trading. While Wolff cannot provide investment advice or recommendations here, he invites your feedback at firstname.lastname@example.org.