How To Find Opportunity In Secondary Offerings & Valuation Downgrades

Beating the market and making money trading stocks year after year is no easy task despite what many will have you believe. It requires hard work, discipline, emotional control and organization. It requires an edge. There are thousands of strategies, chart patterns and tools out there to help you reach your investing goals and there are certainly more ways than one to consistently profit in the stock market. The key is finding your own way, your own path. Master the essentials, then over time come up with your own strategies. Patterns will emerge that you can take advantage of.

One such pattern that I have found is what I call a "red tag sale". This happens ahead of the opening bell on news of a valuation downgrade in a top performing stock. 90% of the time, you can throw brokerage price targets and opinions out the window. The edge and your opportunity comes from taking the opposite position. A valuation downgrade in a top tier company is nothing more than a red tag sale in that the brokerage downgrades the stock based on valuation, the stock gaps down at the open and you get the opportunity to pick up shares in a high flying stock a bit cheaper.

When looking for these kinds of opportunities take a look at the chart to decide if it's a good play. Did the stock recently breakout? Is buy volume spiking? Is the stock at all time highs? If a top rated company recently broke out with big volume and a valuation downgrade pushes the stock back to the breakout point, then that is an ideal situation to get in or add shares. I wasn't able to find a good recent example of this but you get the idea.

Another situation that I like to profit in involves a secondary offering announcement which occurs when the company offers additional shares for sale. The dilutive effect of the increase in supply most often results in a sell off in the stock but again this is often temporary in the best companies because the demand is able to soak up the added supply. This is another chance to pick up shares a bit cheaper. Again, I look at the chart to see if this temporary dip offers a good entry point to initiate a position for add shares.

A perfect example of this occurred on Friday morning in JA Solar Holdings Co. Ltd. ADS (JASO), a highly rated solar play. On Thursday the stock broke out of a cup with handle base with good volume, but announced on Thursday night a registration with the SEC to offer additional shares. If you missed the breakout, this news offered a chance to get in near the breakout point!