November 30, 2011
Uncategorized
By Geoff Bysshe
This morning China lowered its Reserve Requirements, and the Fed and other major countries central banks announced coordinated actions to ease strains in financial markets. As a result the market will likely gap open much higher. Markets have been gapping big up and down frequently, and this action is likely to continue.
On gap days there are a few conditions you can look for to identify the best stocks to trade. One condition is unusual volume in pre-market activity. With Hotscans (shown below) you can scan for the stocks moving up or down the most based on the dollar change or the percentage change, and as a result of the unique HotScans display you can instantly see which of the big movers is moving on unusual volume!
You can also measure the “unusual volume” 2 ways. First, relative to what the stock normally trades in extended hour trading (I don’t know of any other product that does this). This is HotScans’ default pre-market volume gauge so you can see truly unusual volume. You can also scan for stocks with the most absolute extended hours volume. This can be helpful because you can see were the pre-market liquidity is as well as pick up on some other insightful patterns.
A quick glance at the “Pre-Post Market” area in HotScans will give you a good sense of whether there are a lot or just a few stocks that are moving big, and if the move have unusual volume.
Once you identify the stocks that have big volume you’ll want to look at their pre-market action on a chart. The most interesting ones to trade are those that have had a consistent level of high volume in the extended hours. Many times one big transaction will create and “unusual volume” reading, and this is not necessarily and event worth your focus.
In a future post I’ll cover a second condition to look for on gapping days – the stocks location relative to historical ranges.
In the screen shot below you can see that there are a lot of stocks gapping higher by huge percentage amounts, but there is nothing that stands out in the volume category. CF has very high volume relative to its extended hours norm (429%), but its actual volume is only 44,108 which is not a lot of liquidity. SINA is also up on pretty big volume (76%), but it does have decent actual volume – over 100,000. Neither is a real stand out, but it’s a good place to start looking.
More importantly may be the big picture which is a big gap day, but the volume is lacking. If the volume does not pick up when the market opens the gap is unlikely to follow through.
(clicking on the image should enlarge it)
Pre-Market Gaps Trading on Volume