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The 3 day rule...
One of the requests we had from a reader was to delve a bit deeper
into the "three day rule" so as promised here it is: If you watch
closely, you often see something very interesting happen. A stock
misses its numbers or it guides lower and "boom" down it goes, maybe
4, 6, 9 dollars lower overnight. Well, sure enough it opens the next
day and gets hammered. But interestingly, either on the next trading
session or the one that follows, we often see the stock move abruptly
higher. More times than not, it gets upgraded too. What's up with
that?
Well, we can only assume, but we can probably get close enough. When
that stock got hammered, not only did the "common folk" own it, but
some institutions owned it also. Not only that, some of their best
clients owned it. We don't suppose they were all that happy to see
their holdings get clocked like that! So, what can they do about it?
Well, if they come out the next day and upgrade it, it looks awful
fishy. So they wait an extra day or two.
But sure as rain, you can bet that just ahead of the open on the
third session from the day of the blow up, some talking head is going
to upgrade it and toss a bunch of "lesser" client money at it so
their big clients can get out! We believe this is exactly the way it
works and we have seen it too many times to ignore it.
So, lets' look at the mechanics of it. Let's say it's Tuesday night
and XYZ warns for the quarter. Boom, it's down 6 dollars after hours
(this is day one), then the next day it's up for grabs. For the most
part it probably gets rocked again, depending on how severe the
shortfall was (this is day two).
But, entering into day 3, keep your eyes open for the upgrade or at
the very least, the "suspiciously" upbeat comments. More times than
not they will come and more times than not the stock will rebound
smartly that day. Okay, so how do you play it? Well if you aren't
afraid of risk, you can buy it at the close on day two and hope for
the upgrade/bounce on day three. Or to be safe you can wait for it to
materialize and then buy into the stock after the initial pop has
faded (if indeed it does pop).
This won't work every time, but it's worked a lot more times than we
can count. So, remember the "3 day rule" and you just might put a few
bucks in your account by playing it.
http://clix.to/wallmann
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