Dec

4

Trading Low-Priced Stocks In the Research Lab – A Couple Examples SHZ REDF

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This time last week I was growing concerned about “headline risk”  in the market which didn’t materialize. The S&P was sandwiched between the 20 day and 50 day moving averages and based on the daily chart it looked like the 50day was the next stop. Well that’s exactly what happened on Monday and Tuesday but then like magic, the market gapped up Wednesday to open right on the 20-day and never looked back. This is the type of action you see in a Bull market with both the wind at our back and when “The Bernanke’s”  got our back.

It’s important to trade based on what you see happening on any given day rather than preconceived ideas about what the market should do or what’s happening on the macro level. Anyone that has been trading long enough knows that the big directional moves occur only about 20% of the time, and many days are just choppy and boring. Strong moves like we had at the end of last week are often followed by profit taking and consolidation, so be careful next week.

The recent action seems to be in the small cap stocks as I mentioned last week.

When trading the stocks from the Low Priced picks it is important to employ quick in and out trading as these are typically speculative stocks. You must always be ready to sell immediately when one moves against you. It seems like last week many of the Low Priced  picks made extraordinary moves, but you had to choose the entry and exits carefully. These stocks trade in significant intra-day ranges so it’s imperative to have a quick trigger and good timing.

SHZ is a good example from Friday. The pick price was $2.69 and is shown in the yellow ellipse. As you know we prefer to wait for the pullback and setup that comes later and Doug marked it up as a trade with an entry at $3 (green arrow), shortly after 11:00. The green horizontal line shows multiple possible entries at that $3 level during the day. The great thing about waiting for the pullback and setup is that we know the best place to set the stop, shown as the red horizontal line. I have the profit zone in the yellow box between $3.15 and $3.25. Typically I will pick up 1000 shares of something like this and look for a profit between $150 to $250 and as you see on the chart there were a couple chances to do this during the day.

 

shz1242010

 

Seriously, is there any easier way to make a couple hundred bucks? Sure there probably are but this is the one I prefer. It’s called speculating.

Now of course it’s not always this easy and there and the timing is everything. When you speculate there will be many times the stock will hit the stop and take you out, but that’s just part of the game and you move on to the next one. Keep in mind it would not have been that difficult to pull the trigger as soon as SHZ hit the list, in which case the fill would have been somewhere around $2.70. In that case you could have been in and out with a $300 profit well before Doug was even setting up the pullback entry.

In that case there would have been a lot of options as far as where to take profits. Sometimes when I get into a trade like this that moves quickly in my favor, I will take 1/2 off and let the rest ride for a while. There would have actually been a number of ways to play this stock Friday, but the point is that these small stocks can offer a lot of action.

I’m frequently pondering the concept of buying 100 shares of a $30 stock versus 1000 shares of a $3 stock. I actually do both but I find that the Low Priced stocks seem to be more likely to put on a long-range day while the higher priced stocks will stall out. It just seems easier for a $3 stock to move to $3.20 than a $30 stock moving up to $32. Although with our picks both do happen frequently. I find a lot of times to get the move I’m looking for in the $30 stock I have to hold it a few days.

It’s really just a matter of the market environment and my propensity for speculating. Right now the environment seems to be working well for the small caps, as it usually does this time of year. Notice the Russell 2000 (IWM) has moved above the November 9th high while the other indexes are still battling with it.

Next week will be very interesting. As I mentioned, barring any headline risk, we might see some follow-through of the momentum, but then I expect some profit taking and consolidation.

Regardless of the overall market I’m confident there will be several picks like SHZ in the Low Priced scan next week and I will be focused on stocks between 2 and 10.

While I call this speculation, I am still very selective on which ones I actually trade and I don’t throw caution to the wind and just buy them as I see them pop in. I always look at the daily chart to give me an idea if the particular stock has a habit of making  long range days and I look for previous spikes on the chart. I also like to see where the stock is coming from to see if it’s already made a significant move.

You might remember REDF when it was a pick Wednesday as we were discussing the fact that it was coming off a low and breaking the trendline on the daily. The move it made that day was incredible and the follow-through Thursday is what I call  “pop and push”. (It was also a pick Thursday).

 

redf1242010

 

Here’s a look at the 5-minute chart of REDF on Wednesday and Thursday marked up with the trendline break entries we like.

 

redfa1242010

 

As you see this is another example of a low priced pick making an extraordinary move, but the thing that sets this one apart is the fact that it would almost have been impossible to get stopped out at any point. REDF never put on any sort of significant pullback at any point during these two days. This is just a great example of what we find on the Low Priced pick lists.

Of course the trick is to identify just the ones that make these type of moves, but as you see on the charts, we have a strategy. Also, we find that many times there is plenty of time to plot the entry based on the moving averages and trendline break strategy without having to impulsively jump in right as the stock shows up in the scan.

Honestly I think if one were fast enough and able to trade every low-priced pick as soon as they showed up, and was able to set a good stop immediately, it would be a winning strategy on most days. The idea is that you would have a few stop outs each day but if they were small, the winners would more than make up for the ones that stopped out.

I guess that would be called high frequency trading and we would probably need to create a machine to make the trades, but the good news is that we find thesse type of stocks all the time and we can still do pretty good as humans.

If you are in to trading the Low Priced picks form the scans in the Research Lab it’s not a bad idea to create a watchlist of all the ones that pop as soon as you see them and start focusing on them right away.

Watch the moving averages as we discuss on the Live broadcast and familiarize yourself with the trendline concept we demonstrate. After a short amount of time you will be able to monitor the picks yourself while we are busy discussing other things. We simply can’t monitor every pick on the show at all times so the idea is that we want you to be able to do it on your screen.

And by the way feel free to alert us to any you see setting up so we can share it with everyone.

Now I know this “low priced stock speculation” is not for everyone and fortunately we also like to take these same concepts and mark up the higher priced stocks as well. Many times we do indeed get the same type of action in a $30 stock as the other scans do indeed tend to pick stocks the day they make that “long-range” move.

The great thing is that visually, it’s all the same. It doesn’t matter what the price of the stock is, what’s important is what the chart is showing you. And of course on down market days you have to be prepared for the pattern to “fail”, but we don’t always have to trade on down days. As a matter of fact, if I only traded two days in a given week, while the market was strong, and only caught a couple trades like these, I would call that a success.

We can discuss this more next week on the show and we look forward to hearing your thoughts on trading these little guys.

Until then have a great weekend.

 

RL1t
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