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>Does anyone have experience/advice in trading large gapping stocks (as
>expected from Compaq on Monday)? I am currently short the stock but not
>sure if I should cover at the open or wait until the end of the day. I
>would appreciate any suggested technical indicators for these type of
>'gapping' stocks.
Jay
Here is how I trade 'em:
a/ The open is the best time to cover a short like you have. It represents
the peak of fear and the maximum imbalance between buyers and sellers, so
the specialists take them down as much as it takes to find other buyers at
some price level to help them share their burden of making the market in the
stock.
b/ By "the open" I mean the first 10 minutes of trading. The stock will
open - say at 26 and trade down to 24 in 3 minutes. All these orders getting
filled will be pre-existing orders on the specialists' system and it will be
virtually impossible to trade off the screen since the fills get reported
late on days like this. You are therefore better off having a GTC limit
order to buy at 1 buck above whatever the opening indication looks like, and
be sure to have your order logged before 9:30 regardless of opening delay on
the stock. Once the limit is hit it turns into a market order, and you will
be given a lower fill if price gaps through your target. Thus it is almost
immaterial where your limit price to buy is on CPQ, a 30 or a 28 or a 25 or
a Market order will get you the same fill if it gaps open to 22.
I would do the above on at least 50% of the position.
For the balance, here is what I do since I am never really sure if the
opening gap is filled by a retracement on the same day:
There normally is buying pressure immediately after the open. This lifts the
stock up a couple of bucks, and this gap also lets the bottom fishers come
in and buy - who think they are getting what was once a $50 stock for half
that value due to a temporary "Wall St Knee-jerk". All this combines to
bring the stock back up for 2 or 3 days - maybe for CPQ may also be a week
since it is already so low.
My trailing stop on the remaining position is therefore 1 buck above Friday
close - if you still want to be strategically bearish and ride the downtrend
and have half a position.
Equities like CPQ almost never make a V bottom. There usually a retest of
the new lows (within about 1 dollar) a few days or a couple of weeks later,
at which point I re-evaluate whether a double bottom is being formed or
should I ride the trend.
Here are a few examples whose daily charts you could pull up to see what
happened. The only difference between these and CPQ is that they were riding
bull trends when they gapped down open, and CPQ has already been in an
established downtrend. Given that, one HAS to respect the fact that this may
be an exhaustion gap happening on Monday.
PMTC - Parametric Technology
CA - Computer Associates.
I no longer have intraday charts on these but the dailies convey the
picture.
Most technical indicators I know of fail, due to the largeness of the gap.
The only reference points therefore are prior support levels and intraday
price action on a 5 to 15 minute chart.
Regards
Gitanshu
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