Watch for buyers exhaustion

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Watch for buyers exhaustion

November 22, 2006

Pradeep Bonde

Shorts do not drive the market down. In larger market ecosystem shorts and perma bears are small insects. What you have to watch for at this stage is buyer exhaustion. On some of the high flying stocks the greater fool theory is at work, where there are no more fools ready to chase $3-5 every day gaps. The latecomers to the party find buying the morning exuberance leads to them being left to hold the bag.Some stocks have been up for days without a negative day. They are extremely prone to such exhaustion.

For longevity of this rally a correction is the best course of action. Picking individual stocks not prone to buyer exhaustion is currently the key.

6 comments:

walter said...: watch for bear exhaustion too...; Nov 22, 2006, 10:10:00 AM
Pradeep Bonde said...: That might be hapening on SHLD today.; Nov 22, 2006, 10:29:00 AM
walter said...: you know of any way to distinguish between exhaustion gaps vs runway gaps vs normal good strenth gaps, etc?; Nov 22, 2006, 10:40:00 AM
Pradeep Bonde said...: I make my leaving trading runaway gap on earnings. One has to look at catalyst plus the magnitude of gap. Gaps of certain magnitude indicate information mismatch. A new set of information was complete surprise and that indicates the move will proceed in that direction. Typicaly this happens on earnings, new products (in biotechs), regulatory action (on short side), or aberration (say a company has earning growth of 30, 34, 30, 40, 37.....for long and then 5 or -10 or the other way round 5, 7, 6, 8,---annd then 100)
So I always investigate 20% plus gaps on both side to see opportunities. You also need to see the volume on such moves. I look at 20% plus 1 million volume.
Exhaustion gaps are easy to find if you know how much % a equity has moved I a year. Plus same thing works on these gaps you see sequence of earning like 80, 100, 120, 130, 120.... and then 140. The stock gaps up like HANS but by that time it was up more than 800% say in a year, so when the grandma in Tim uktu gets excited about it, it is exhaustion gap.; Nov 22, 2006, 10:54:00 AM
Pradeep Bonde said...: And those emailing asking if SHLD is short, no for the record I am long. Shorts are getting squeezed there. Do not trade blindly on what you read here.; Nov 22, 2006, 10:57:00 AM
Pradeep Bonde said...: The best place to find exhaustion gaps is IBD 100. At some stage they just move ahead of their potential and once the IBD crowd and others get very excited, there are exhaustion gaps or island reversals. IBD 100 is good source of ideas on both long and short side. These gaps also tend to be clustered around earnings.; Nov 22, 2006, 11:17:00 AM

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