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A Lesson in Stocks That Gap Down

We have noticed on the message board some newer members asking about stocks that gap down.  They seem to want to buy these stocks just because of the big gap down.  They think that these stocks are all of a sudden cheap and think they are getting a bargain if they buy them now.  Tonight's charts are dedicated to the subject of gap downs. In tonight's charts we have some examples of why we should never buy a stock that gaps down unless we are playing a very short term dead cat bounce.  If you are buying them for an investment be prepared to wait it out for a very long time.  You see these stocks tend to keep drifting lower after the big gap down.  There may be a small bounce but after that small bounce they tend to retest the lows of the gap down and in most cases continue to make new lows.  Tonight's charts will prove that buying such gap downs rarely pay.  There are 11 examples tonight but there have been literally hundreds of these types of charts just this year. 

Just because a stock goes down 50% today does not mean it is a bargain tomorrow.  For me anytime a stock drops that much on a gap down it means stay away.  There is a good reason it is taking such a discount.  These stocks usually move down on enormous volume as much as ten times average daily volume or more.  What this tells us is mutual funds and institutions are selling the stock at any price.  They just want out and if these big boys want out bad enough to sell it for 50% off then there has to be something wrong with the company.  I am not smart (or dumb) enough to try and outsmart the socalled smart money. 

Dead Money After the Dead Cat Bounce
Over my trading career I have seen many stocks that have gapped down like the charts you will review tonight.  I have seen enough to know the pattern well and the results are the same most of the time.  With those odds against us we know that we do not want to be long these stocks the day after the gap down.  Playing them on the day of the gap down is okay for a day trade bounce but we must be out of the trade that day.  We have played a couple of these like VLTS and RHEO for nice 30 and 40% gains holding the stocks for less than 2 hours on the gap down day.  These were strictly dead cat bounce plays and were never intended to be held more than a few hours.  The next day and the subsequent days can be very frustrating if you hold stocks like these. Just remember the rule is never to buy them unless you are intending to just take the quick gainer intra day.  They can pay off handsomely if you are nimble but they can also be dead money for a long time if you do not dump them quickly.  

I have been trading long enough to know that there are no bargains in the stock market and those who think there are are fooling themselves.  Our long time members have learned this valuable lesson already.  We want others who may not understand why we do not buy stocks that seem to be bargains to see why we do not.  No words can explain why better than the charts so tonight we have visual examples to prove our point.  Remember this in the stock market if it is too good to be true it probably is.

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