Saturday, January 13, 2007

Tale of Two Stocks

Today’s lesson, kiddies, is how to recognize a short squeeze on the 15-minute charts and how to recognize the difference between a scalper’s stock and an investment stock.

First I will show you one of the scalpers latest favorite – CRVL. Friday's chart provides an excellent example of a blow-off bottom. The reason why it is a blow-off bottom is because the shorts have to cover. Later in the post we'll show you why the shorts had to cover but once the buyers came out in force and started picking off the offers the stock went up. Because the stock is a low volume trade it can be moved very quickly in price. Consequently the shorts need to move very quickly to ensure their profit. Consequently the price rises rapidly.

If you watch the bid – ask for awhile during one of these buying-selling sprees your head will spin. Occasionally there is a 15 or 20 cent variance. When I want to buy some I put my limit price between the two and it gets hit quickly. I wouldn't use a "market" order in this stock because "market" has no meaning.

Towards the end of the day the day traders start bailing out and the price oscillates with some very large volume - relatively speaking. That is an ideal scalper's stock - low volume and lots of mo-mo. (Mo-mo is a roaring 90's term for "momentum" - I know - so last century).

Compare that to YHOO, which is an investment grade stock. But even in YHOO a blow-off bottom is a blow-off bottom - except in YHOO the volume is in the millions and the price can't be easily manipulated by a handful of snot-nosed kids in their mommy's basement. But the same dynamic applies - traders are short the stock - the market starts moving against them and they have to scurry and cover their bids. Notice too that with YHOO there was no end-of-day bail-out. I will discuss the significance of this at length in a subsequent post this weekend.

You can make money in either one of these stocks - just watch for the blow-off bottoms - if you are careful with CRVL and keep the sharks from eating your lunch you can ride that puppy too.

For those of you who don't want to sift through dozens, hundreds, thousands of charts a day you may simply want to watch the Q's. It too will show the blow-off bottom and when it does you know it is time for a feeding frenzy. So this is what the traders saw occurring Friday at 10:30 - the Q's started to rise - this brought terror into the shortist's hearts and they started to grab every offer in site.


Anonymous said...

As always, a great post. How long have you been doing this?


Great view on two stocks.