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Wednesday, January 7, 2009

Opening Gap Down - WCT and Parkson from an Intra-day trader perspective

This article is for those interested in "quick screws" (i.e. intra-day traders mainly). If you are a longer term trader, or an investor, you may ignore this article as it would not fit your time-frame.

This morning, both WCT and Parkson opened with a gap down. They both followed fairly standard moves, where an experienced intra-day practitioner would have seen many, many times. The chart patterns are not unique, but have been repeated many times before. One of them is an ideal stock to trade very quickly with anticipation (in minutes). The other would have been clearly avoided. Do you know which one?

Well, if you did not, read on. And make sure you understand why one is a good prospect, and the other isn't.


PARKSON has been on a mid term uptrend in the last 2 months, since hitting the low of $2.55 on 28 October. Yesterday, it closed at $4.28, near its intra-day high of $4.30. The intraday low is $4.18. Due to its uptrend move, longer-term traders and some investors might have been tempted to purchase it.

This morning, PARKSON opened at $4.18. Would this have been a "sale"? A discount price in view of its steady uptrend the past 2 months?

For the experienced intra-day trader, the answer would have been a resounding NO. Not at $4.18. Even if you don't know any fundamental analysis of PARKSON, and even if you didn't check the news in the morning and learnt that PARKSON has lowered its growth guidance, the opening price alone is sufficient alert that something is amiss.

The experienced trader would pause for an instant and wait to see how prices behaved. And true enough, on third trade, price fell to $4.16, which is lower that yesterday's low. Already, Mr Market is SCREAMING at you to NOT touch this stock. It has all the makings of a falling knife. And if you even SUSPECT that it is a falling knife, DON'T touch it.


Now, even if you don't know what type of stock WCT is or what business WCT engages in, the price chart tells you all you need to know if you are an intra-day trader.

You see the rapid fall in prices in the 2 months (Sep to Oct), and relative sideways move.

Yesterday was a strong limit down move. This is huge alert by itself. A move like this with record volume shows extreme fear, and continued fall. Note that WCT closed from $1.67 to $1.29, which is the limit down price.

And this morning, the very first trade happened at $0.925, and then within the first minute, rose extremely fast. This alone is more than enough sign that Mr Market is SCREAMING at the intra-day trader to jump in at market price. WHY?

Several reasons:

1. Opening gap down near limit down price triggers alert watch.
2. Stock is clearly very oversold in past 2 days.
3. Very rapid price increase in the first minute of opening.

And if you screwed it, you could let go after a few minutes for a very nice quick trade.

Counter-intuitive isn't it?

Well, if you are an average investor, probably, you will have thought that Parkson is the better screw than this "WCT" stock. After all Parkson is probably better known, and many bloggers and investment advisers have talked a lot about Parkson. Heck, even Mr Tan Teng Boo was bullish on Parkson, so, $4.18 must be a discount right? And yet, what went wrong?

The answer is actually simple. An intra-day trader couldn't care less about fundamentals, for the simple reason that fundamentals are usually "longer-term" in its effects. Price action dominates his entry/exit decision, and these are governed by Technical Analysis. You may be surprised to know that the above chart patterns are actually "standard" chart patterns for the intra-day technical trader. These chart patterns repeat themselves with many different stocks. The key is to understand all the combined elements, and interpreting them correctly. One small difference in nuance, and the technical picture is different, with different market psychology.

Yet, you may ask - both gap down, but why is WCT the better intra-day trade than Parkson?

Again, the answer is rather simple. Parkson has been uptrending the last couple of months, and yesterday's candle was still bullish, with its story intact. Yet, this morning, something was amiss because it gapped down at the low of yesterday's price. Psychologically, it means that market fears something on Parkson, and this tells you to wait.

However, WCT limit down yesterday, and this is the crucial difference. The opening also gapped down, and again, it is near the limit price. It isn't enough to jump in yet. But the key difference is the price action IN THE FIRST MINUTE. This one ripped up so fast, that Mr Market says "technical rebound due".

Bear in mind ALWAYS that these patterns are:

1. Always repeated - just different stock name, different times, different stories, different reasons, but at the end of the day, it's the same price action.

2. Doesn't happen often - but when they happen, you must sit up and pay attention.

3. These patterns are primarily for the intra-day trader with time-frames that measures in minutes. Half a day is far too long.

Also worth bearing in mind that so far, all I've showed you are merely "chart patterns" and price actions. I have not talked about MACD or RSI or any other technical indicators. The reason is because these technical indicators are merely derivative of price. The primary factor is price because you only make a profit if you Buy Low and Sell Higher than what you buy. Never forget this fundamental point.

So, does this mean that fundamentals are irrelevant?

If you are an intraday trader, perhaps the most accurate answer is that they are important, but secondary to price action. For example, Parkson news announced last night at 7.35 PM is important one - the warning on SSS growth is already a critical news because 7%-8% is far lower than its high P/E multiple. A prepared fusion trader would take this piece of information and be alerted, and when he sees an opening gap down, it would confirm to him to stay away from Parkson at the opening.

WCT news on the other hand was not surprising - all the announcements yesterday on WCT were reflected in the limit down price - the only uncertainty is whether 30% drop in price is enough, or is there more to come, and he will not have the answers until 9.01 AM. And then, he sees a further huge gap down this morning which tells him Mr Market thinks there is more downfall. So, the prepared fusion trader would have been on the lookout for that strong upmove in the first minute of opening. And Mr Market tells him that someone out there really want to buy WCT at 92.5 sen this morning very, very strongly. And the first minute was so critical. Miss the first minute/s, and the bulk of the gains are more or less over. Fifteen minutes later, the professional intra-day trader would have already lost interest in WCT.

If you are an intra-day trader, all that I've mentioned here should be "standard stuff" to you. Nothing I mention here is surprising. WCT especially is a high probability set up that is bread and butter of the professional intra-day trader skill. Parkson set up is also equally high probability, except the message there does not help him make money, but merely helps him NOT to lose money. Knowing how to make money, and knowing how NOT to lose money are BOTH EQUALLY important to the professional intra-day trader.

Happy reading!

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