Yesterday morning, HGSI announced that their 15.5 million share offering would be priced at 26.75 (below a 27.46 close). The company had previously announced the offering before the open of business on Tuesday yet the stock was only down 36 cents over the two days. As I harped on in the chatroom all morning long yesterday pre-open, note in the blog, discussed via the audio, and detailed in the morning call yesterday, I knew one thing: the stock had absorbed the share offering news fairly well. The company has 165 million shares outstanding so with an additional 15.5 million issued, one would expect each share to be worth less- mathematically about 8.5% or so. The decline (36 cents) was less than 1.5%! What this indicated to me was a clear idea for two distinct trades. The simple one is as such- since all signs pointed to it going higher (to me), if it traded below the offering price of 26.75, it’d be a short. Besides being completely wrong in my prognostication, it’d also indicate to me that the consortium underwriting the stock simply couldn’t support it. Well, if say Goldman Sachs and Morgan Stanley underwrite it, it is in their best interest to keep it above 26.75. Thus, any tick below 26.75 would tell me that something was amiss and one should short it. The other trade worth doing is the one that I did. The stock opened down two cents at the 9:30AM bell. Why? I do not know and cannot begin to guess. But I do know that if I was a longer-term trader and I came in short HGSI because I thought that the stock would drift down and it got positive on the day, I’d be scared. And if I’m scared (and short, say, 25,000 shares of HGSI), I know I cover. Thus, when the stock got positive, I immediately bought everything I could stomach. I had my outpoint (at a new low of 27.43) whereas my reward was upwards of a dollar or more on the panic. I didn’t quite make the dollar a share (it rallied 1.79), but I thankfully did do somewhat decently in the stock on a rather sizable position. The two things to take from this are as follows: use common sense to do a trade- particularly such as this. Is it is perfectly rational to me to short a stock below where big institutions value it or to buy the stock when it fails to go down whatsoever on said offering. Second, it is pointless to do trades when there is no trigger for it. Someone in the chatroom yesterday morning pointed out in the pre-open that HGSI was potentially a short thru 27. I asked him why he felt this to be the case six different times based on the news. He of course could not answer because there was no logical and easy reason to do so that’d make rational sense. In essence, this actually helped me because it drilled my hypothesis that much more into my head as it became even clearer. Make sure that you understand the trades you want to do and do them for the fight reasons- oh, and do not trade blindly. If you cannot make yourself understand in plain terms why it is you’re doing a trade, why do it?
Markets in Asia were mixed overnight. But everything has changed dramatically this morning. The unemployment report this morning was fantastic with the unemployment rate decreasing and job losses shrinking. Now, you can make whatever you want of the data and its reliability, but the markets love it. Bonds are sharply lower, the dollar is rallying against the yen and selling off against the euro, and gold is down 2%. For at least the moment, all is well. Look off-hand for the strength to hold. Trading opportunities will likely be few as the best shots today by far have already occurred as we likely flag out market-wise ahead of the weekend. Focus on relative strength plays and A-B-A2 patterns on stocks in the news.
Watch list:
12042009Eriklist.zip
Reiterating-Please understand that if the ideas do not get to the hoped for set-ups cited below, more often than not, one should not blindly trade the symbol next to said idea. If the whole story is not there -If something is good, assume either a short thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified.If something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-
Good- The following stocks have good news and/or a strong technical pattern
MRVL- good earnings
HRS, FLIR, MANT, OSK, ATK- mentioned positively on “Mad Money” last night
RMBS- announced Samsung will license one of its chips
BIG- good earnings
LDK- reached deal to continue solar wafer supply contract with Q-Cells
Bad-The following stocks have bad news and/or a weak technical pattern
SWHC- poor earnings
MENT- poor earnings
ARST- poor earnings
TTWO- terrible earnings
PNC, STT, COF, GS, MS, JPM, WFC- among the big capitalization financials closing near their lows
PFG- closed near a low after issuing poor earnings guidance
ANF- closed near a low after issuing poor retail sales data
ARO- closed near a low after issuing poor earnings
NUVA- broke to a new trend low; downgraded by Wells Fargo this morning
SIRO- poor earnings
Earnings:
FRI DEC 4 BEFORE
BIG SIRO
Good luck today.
Epiphany Trading, LLC
http://www.epiphanytrading.com/
Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
Joseph R. McCandless- Managing Partner
D. Timothy Seaquist- Managing Partner
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