A Look at the Charts: Mind the Gaps

I am a big believer in gaps on charts being filled. It does not have to happen, but just from observing over the years, I think this has a 98% success rate. The question is timing; literally gaps can fill in days or years.... or anything in between.

I am going to post 3 "gaps" here, one is filling, 2 are interesting potentials...

We sold most of our James River Coal (JRCC) Friday, as it had turned back to $18, but below key resistance levels. I said I wanted to buy it on strength over $19. And to that I exclaim "whew" - it is down 14% Monday alone. I am going to get back a bit of what I sold Friday just because this gap, from early May, is now filled.

However, this is one damaged chart, and unless reflation makes a miracle recovery, it will need to be sold as it approaches $18 again.( p.s. where are all the "reflation" fans with their thesis the past 5-7 days?) Incipient world recovery not driven by Chinese restocking? Oh yes, it was just a speculative burst of stock jockey and program trading that had nothing to do with fundamentals.... err, a weak dollar play.

Next is a name we don't own but lamented missing [May 27, 2009: A-Power Energy Hires CFO - The Stock that Got Away]... speculators ran up all types of alt energy stocks regardless of potential, and A-Power Energy (APWR), whose main business has nothing to do with alternative energy, is lumped in with them (they do have a wind turbine business that is tiny, but it is what American investors associate them with) They had a not very inspiring earnings report and then a surprise convertible debt offering a few days later - nice combo to knock your socks off. Not like the management could have mentioned the debt offering right at the earnings press release - that would be too convenient for investors.

Generally, institutions like to hedge their convertible debt purchase with a short of the stock, and then other institutions pile on to short knowing this. The stock has been crushed, going from $13 to $7.50 in just a handful of sessions. Monday, it broke its 200 day moving average. A great bargain? Perhaps - but look at what I found... a nasty gap. Down at $4.60ish. Do you short that? Gosh it takes nerves of steel, as this name moves 10-15% a day at times.

But it is not looking good for APWR fans. If we get down to sub $5, I'll probably buy it for the next go around of "ignore fundamentals and wave hands wildly about talking oil to $80 and China will bring the whole world back based on a $500B stimulus package". Frankly management has been a constant disappointment with unkept promises, but speculators who will drive it up again at some point in the future don't care about such details. For them its "oil up, I must buy wind related. Chinese even better."


Last we have Research in Motion (RIMM) - we avoided it into earnings, and it's now fallen from $86 to $68 in just over a week. Monday, it gapped down below its 50 day moving average and sits just above its 200 day, which should be a good support for such a widely held stock. When this market bounces, I expect it to put in a cursory rebound at least. But when I pull back the chart, I see some danger ahead; there is a massive gap (ironically from their PREVIOUS earnings) down there at $49, and then a small one just the day before at $46. Impossible to fill? A nearly 50% drop from that $86 print just behind us?


Nothing is impossible! But for RIMM to take that sort of swoon, we're going to have to see at least mid 800s on the S&P 500) if not lower. If this name breaks below the 200 day, I would not be surprised to see a freefall; I might partake myself.

So 1 gap filled, and 2 gaps at egregious distances to go. Let's keep an eye on from afar to see how it develops.

Long (10 shares) Research in Motion; James River Coal in fund - no personal positions

Comments

[Roger Knights:]

Rambus (RMBS) looks as though it will, today, fill a big gap it made last week.

Jun 23 08:19 AM

[ain't no fo...:]

Mark, On JRCC I'd be very fast in and out of any bounce in the stock if you're looking to scalp a trade - there is more to watch there than the gap. Many, many stocks, indices and ETF's have traced out very similar patterns over the past week - SPX, INDU, TRAN, SSO, UYM and JRCC to name just a few sold down hard last Monday and Tuesday, and then formed small, tight 3 day bear flags that came back up and kissed significant moving averages - in all but JRCC's case they tagged their 9 day EMA's, in JRCC's it was its 200 day EMA.

Predictably, ALL of the above, and many others with almost identical patterns, broke down hard out of these bear flags yesterday, and their trend would be expected to continue down at least over the short term. Those bear flags are nasty little patterns and when you see them tag an EMA like that you're almost assured of a down move in the stock or index (unless JPM comes in gunning buy programs of course).

Also, in the case of SPX, INDU, TRAN, SSO, UYM, they have all flirted with major 200 or 50 day EMA resistance, failed, and now broken down below the respective 50 day EMA's - the 50's represent the last line of support for much of the market, and unless these guys get back above them and hold there is a lot of air below.

As for JRCC, its chart has already made that break, decisively.

As for APWR, for people holding that one, denial ain't just a river in Egypt... one broker last week took them off their coverage list stating that they were disappointed by the lack of "transparency" in the company. Gee, welcome to China... you expected something different?

Jun 23 09:01 AM

[TraderMark:]

Don't disagree with you - I have the highest cash level I can remember - I see a lot of charts making he right side of head and shoulders...

Jun 23 11:58 AM

[connorport:]

As for APWR. Cash was there from the contracts as i previously stated that would have added .40 per share to earnings but what im not getting here is that the money was put in with the cash and not on the books. Can anyone clear this up for me?

Jun 29 08:51 AM

[connorport:]

As for APWR. Cash was there from the contracts as i previously stated that would have added .40 per share to earnings but what im not getting here is that the money was put in with the cash and not on the books. Can anyone clear this up for me?

Jun 29 08:55 AM

[Wilson Siu:]

Roth Capital had alot of short positions themselves, and they had strong incentives to write negatively on the stock.


On Jun 23 09:01 AM ain't no fortunate son wrote:

> Mark, On JRCC I'd be very fast in and out of any bounce in the stock
> if you're looking to scalp a trade - there is more to watch there
> than the gap. Many, many stocks, indices and ETF's have traced out
> very similar patterns over the past week - SPX, INDU, TRAN, SSO,
> UYM and JRCC to name just a few sold down hard last Monday and Tuesday,
> and then formed small, tight 3 day bear flags that came back up and
> kissed significant moving averages - in all but JRCC's case they
> tagged their 9 day EMA's, in JRCC's it was its 200 day EMA.
>
> Predictably, ALL of the above, and many others with almost identical
> patterns, broke down hard out of these bear flags yesterday, and
> their trend would be expected to continue down at least over the
> short term. Those bear flags are nasty little patterns and when you
> see them tag an EMA like that you're almost assured of a down move
> in the stock or index (unless JPM comes in gunning buy programs of
> course).
>
> Also, in the case of SPX, INDU, TRAN, SSO, UYM, they have all flirted
> with major 200 or 50 day EMA resistance, failed, and now broken down
> below the respective 50 day EMA's - the 50's represent the last line
> of support for much of the market, and unless these guys get back
> above them and hold there is a lot of air below.
>
> As for JRCC, its chart has already made that break, decisively.<br/>
>
> As for APWR, for people holding that one, denial ain't just a river
> in Egypt... one broker last week took them off their coverage list
> stating that they were disappointed by the lack of "transparency"
> in the company. Gee, welcome to China... you expected something different?

Aug 25 03:26 PM