8/23/2010

How to find profitable IPO trading opportunities using Telechart


In the last few weeks the IPO's are in play. IPO's go through hot and cold phases. Suddenly in last few weeks IPO's have caught some bid. A IPO like Jinko Solar JKS has doubled in last one month. China Kangui Holdings KH went up 30% in few days. Fabrinet (FN) went up 70% in few weeks before reversing in last 2 days. MakeMyTrip has seen one of the hottest debut for a IPO in recent months.


Some recent IPO Big Movers:


Note: Green spikes and white spikes in middle window indicate buy signals. Red indicate sell signal.

AMRC: Ameresco Inc.

JKS:Jinko Solar
MERU:Meru Networks Inc

QLIK:Qlik Technologies Inc.

CIS: Camelot Information Systems Inc.

VPG:Vishay Precision Group
HSFT:Hisoft Technology Intl Ltd.

BORN:China New Borun Corp 
FN:Fanrinet 

MMYT:MakyMyTrip Limited

How to find IPO using Telechart


If you have Telechart you can find such IPO opportunities daily. It requires a bit of tweaking as IPO's are not separately listed as watchlist. 


To find IPO follow the following steps:
  1. Go to 'All Stocks' 
  2. Sort the All Stocks list by Price Growth Rate 1-year.
  3. Once you sort scroll down and look for stocks with no sort value. These are stocks which have IPOed in last one year.
  4. Flag all the stocks with no sort value.
  5. Create a new watchlist "IPO"


Now these are the stocks which you want to use for swing trading. You can use any swing trading method you like to trade these stocks. 
I use a breakout based method to swing trade these stocks. Breakout based methods tend to work well on IPO's in my experience.


To find breakouts I use a simple Stockbee breakout scan.
(100 * (C - C1) / C1) >= 4 AND V >= 1000 AND V > V1


After the scan generates buy ideas I use a series of guidelines to narrow the trade. There are seven guidelines I use to narrow the trades or select the best opportunities from the scan list


Seven things to look for in an IPO 
I have been trading IPO breakout as one of the daily core methods and by trial and error found certain things work better on IPO. Those 7 things are now crystallized as guidelines for selecting IPO trades. They are in order of importance:
  1. High volume on breakout. You want to see 2to3 times or more volume than average 10 days volume for the IPO. For IPO with less than 10 day trading history you want to see a highest volume or second highest volume day since IPO launch on breakout day.
  2. A 5 to 10 days sideways move prior to breakout day.
  3. Relative linear trend. Relative linearity is one of the most important criteria I use in all my breakouts based swing trading methods. The Relative Linearity or Fractal Efficiency scan in Telechart can be done as:
    (C - C20) / (ABS(C - C1) + ABS(C1 - C2) + ABS(C2 - C3) + ABS(C3 - C4) + ABS(C4 - C5) + ABS(C5 - C6) + ABS(C6 - C7) + ABS(C7 - C8) + ABS(C8 - C9) + ABS(C9 - C10) + ABS(C10 - C11) + ABS(C11 - C12) + ABS(C12 - C13) + ABS(C13 - C14) + ABS(C14 - C15) + ABS(C15 - C16) + ABS(C16 - C17) + ABS(C17 - C18) + ABS(C18 - C19) + ABS(C19 - C20))
    Using above scan you can pick stocks with greater than +0.30 readings. They tend to have smoother trends.
  4. Stocks should not have 2 or more 4% =ve or -ve breakouts in last 5 days prior to breakout day. 
  5. IPO's with clearly defined catalyst like earnings, or new product or some other catalyst tend to do well.
  6. IPO's with high earnings and sales growth tend to make explosive moves. I always look for an IPO with 100% plus EPS or sales growth.
  7. Top 20 sector IPO. IPO's from Top 20 ranked sector by momentum tend to do very well. In such cases even if they do not have catalyst or earnings, they tend to make explosive moves. 




IPO's also offer opportunities on short side. Most IPO's go down post launch. IPO's as a group tend to under perform the market. One of the problems for trading IPO on short side is liquidity. Many have poor liquidity. Concept IPO's often are good short selling opportunity. Concept IPO's are IPO of companies which have a hot concept but to sales or revenue. These kind of IPO often enter the market during extreme bullish phase. Once the novelty of the idea wears off they spend rest of their time going down.


When the Oil and Gas sector was hot number of IPO's came in to market and many of them are now just footnotes in history. AONE was a cult IPO last year. Now it has been steadily ticking down. Current hot concept IPO is TSLA. At some stae it has high probability of going down. The dot com era was ultimate in concept IPO's. Companies with no revenue and no profit entered market and for few days or months had valuation greater than many established companies and then they crashed. Many green energy and wind energy IPO are now in similar situation. 


Nothing changes on WallStreet, tomorrow some other sector might catch investors fancy and IPO's in that sector will be hot. So having IPO based swing trading method in your arsenal is always a good strategy.


As a side note IPO tend to do well at start of a new bull move. Often they tend to be early indicator of impending bull move 2 or 3 months down the line in general market. So watch the IPO's closely. 




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