Join Dstockmarket's Community - Daily Market Analysis, Individual Stock Analysis.
A quick way to find a stock that will lose half its value very soon is to search for stocks that gap down on unusual volume. If a stock that is below its 20, 50 and 200 MA gaps down, you can be very sure a very big crash is going to happen. Traders will notice this stock and start shorting it which in turn will push the stock lower.
It is easy to spot a stock that is in a downtrend. The stock is below its declining 20 MA, 50 MA and 200 MA. A stock that is in a Stage 4 downtrend is a weak stock that has selling pressure in it. Investors and owners of the stock are constantly dumping the stock. When you see a gap down in a stock that is in a downtrend, there will be a sudden panic.
There will also be many stop loss orders that will be hit. You might be tempted to bottom fish but a downtrending stock that gaps down has a high probability of losing more than half of its value in the coming months. So stay away from these kind of stocks or learn how to short the stock.
In the chart above, you can see DPLO in a downtrend. The stock was already below its declining 20, 50 and 200 MA when it gapped down. The stock gap down on unusual volume. The average volume was about 680,000 shares but on that day, the stock had a volume of 4.3 million. That was 6 times more than the average volume.
If you thought that the stock dropped to only about $23.00 then you are wrong. Guess how much the stock fell?
The stock eventually drop to as low as $12.47!
The chart above is an update on the previous chart. One week after the first gap, the stock had another big gap down. This time even more drastic than the previous one. Never bottom fish a stock that is in a downtrend. You just never know how low it can fall.
The next few charts show the same kind of gap down on unusual volume just like DPLO. You will notice they have a recurring theme.
The chart above shows FGP in a downtrend. Then the stock gap down on unusual volume. In just two months, the stock lost more than half of its value.
The chart above shows the stock chart of popular fitness band company Fit Bit. The stock was already in a downtrend when it gap down on unusual volume. Look how low the stock fell.
When this fitness band came out, I was wondering how on earth can this company continue to survive in the market by just offering fitness bands that track an individuals health.
I thought eventually people will get bored with just a fitness watch that only shows you the time and have some cool but unnecessary functions. They are not like Apple or Samsung which produces phones, laptops and tablets which have become a necessity in today's world. Having a fitness band is cool but is not necessary.
Turns out that investors were also thinking along the same lines because the stock has fallen tremendously since then.
The chart above is a weekly chart of Fitbit. I wanted to put it here for you to see. This stock IPO at around $30. It shot up to a high of $51.90 but then their business wasn't doing as good as Wall Street would like it to be and it started to enter into a downtrend. The stock eventually fell to $6.08!
I want to show you another company that has the same story as Fitbit. The company is Go Pro and many of you would have heard about the action cameras that are so popular among sports enthusiasts.
In the chart above, you can see how GoPro had a gap down on unusual volume. You know how it goes. The stock eventually collapsed to $9.46.
The company IPO at around $28 and the stock fly as high as $98.47. But then the company did not do very well as competition crept in. They also had a product that only a certain type of people would buy. It was cool to have a Go Pro but it was not a necessity for everyone.
They were not like Apple which creates cool products that are a necessity to everyone. In a tech company, you must create and come up with products that people like and have to use everyday. Otherwise you are going to be eaten up by the competition.
Let's take a look at another chart. The above is the chart of GNC. It almost looks the same as the charts above right? They all are in a downtrend. They are below their declining 20,50 and 200 MA. They have a gap down on unusual volume and then they lose half of their value. GNC went from around $21 to $8.56! That's more than half.
The last chart I want to show you is the chart of Under Armour. This stock was already in a downtrend and below its 20,50 and 200 MA. Then it gap down on heavy volume. It traded sideways for a while and some smart people may think that it is a great time to bottom fish this stock. But now you know you should not touch a stock that gaps down on unusual volume. You also do not want to buy a stock that is in a downtrend. Then Under Armour gap down once more. From around $40, this stock drop to $21.58!
The next time you see a stock that gaps down on unusual volume, beware and take note!
Nov 30, 20 09:44 AM
The S&P 500 has broken out into new highs and I believe that it has establish a new support area.
Nov 23, 20 09:05 AM
After breaking out of a downtrend line, the S&P 500 still looks bullish for the near term.
Nov 17, 20 05:26 AM
After the news of Tesla being added to the S&P 500, it is gapping up pre-market.
Nov 09, 20 06:56 AM
After the elections, the S&P 500 is now breaking out of a triangle pattern.
Oct 23, 20 08:22 AM
The US stock market seems to point to a Republican victory. It is still in an uptrend and therefore we should continue to remain bullish.