Morning Market Thoughts

by DAN Good morning. Futures are up and it looks like we’re going to open up right at Friday’s opening prints. In other words…right back to the top of the range. A couple of stocks you traders might want to be watching this morning are Oracle (ORCL), which is squeezing pretty tight. There is a high likelihood of the stock breaking out…but I have no idea when that will happen. I’ve set a personal alert at $41.57 on my software. If the alert is triggered, I’ll be notified…and I’ll then start watching it closely as it tests last week’s high.

Another stock to watch at the open this morning is Best Buy (BBY). The company reported strong earnings and CNBC has been pumping the stock for the last 15 minutes. Consequently, the stock is up around 15% this morning. Those kinds of moves are almost (ALMOST!!!) always “gap and crap” moves. Big gap up. Retail traders rush to buy the stock before anyone can get their hands on it. Professional traders, understanding that the opening bell is where all those “buy at the market” orders live, are happy to sell those retail folks as many shares as they want to buy. Their generosity knows no bounds.

And once the retail orders are filled, the demand drops off. Of course, the retail buyers are happy because they got their stock! “Whew! Up only 15%. Sure glad I got in when I did.” They now just wait to be rewarded.

The professionals who sold that stock are just waiting. Waiting for the stock to drop to lower levels as demand for the stock continues to wane. The post-earnings demand has been “front loaded” — it all came at one time (9:30 am). So as demand weakens, the bid price drops. Then the professionals can start buying back that stock that they so generously sold to eager buyers. They buy it back at a lower price, and they have a nice profit for their troubles. Meanwhile, the retail buyers aren’t so happy anymore. Their stock is now lower than when they bought it, and they start to think the market is rigged against them. Happens every time. They got screwed by the market makers. Crooked market! They hate Wall Street.

This happens every morning in one stock or another. It’s the way of supply/demand cycles. Your solution? Don’t buy big upward gaps at the open, and don’t sell big downward gaps at the open.

Now, there ARE always exceptions to the rule. Today, BBY might just keep going. In that case…buy it b/c the pros are wrong (that also happens sometimes). But as a general rule, you should not be chasing big moves. You risk being on the wrong side of the trade and taking a fairly significant loss very quickly.

Oh, also don’t forget about Square (SQ). It was upgraded this morning and is not back to test the 8/4 “gap and crap” high — which was a result of strong earnings. The same type of dynamic that is hitting BBY this morning.

See you in the forum.

–Dan

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