The CATS and DOGS Theory

I had my first major success with 3C back when I was only using it on daily charts, I can't recall the name of the company as it was a  long time ago, but it was sliding and 3C daily was soaring, I had published the idea on my free site, Trade-Guild.net and took some ribbing as it slid 20% or so, then it took off for a 400% gain. The next C&D trade came within days and that also made over 400% in about a week. It's not uncommon for C&D trades to pop 10-50% in a day, thus my partial profit taking "double digit gain" rule, especially if that gain comes in a day.

After having followed many of these trades, I've found that they are the kings of parabolic moves. Often a 50% pop in a day will turn in to a 300 or 400% gain over the next several days to a week. The thing they have in common is that they are cheap, some are liquid, some are illiquid, but they are usually under $3.00 or so. They also tend to fall back down just as fast as they rise, again, my rule for taking partial profits and keeping a trailing stop on the trade to allow for the possible 300% or more move.

Another thing they have in common is that they tend to be in beat up industry groups or they are the laggards of an industry group that has been doing well. They are pretty simple to understand, they are the coffee that is served at the end of the party, kind of letting everyone know politely that it's time to leave.

Wall Street is by no means ignorant of human emotion and habit, thus after a nice move in the market or in an particular industry group, the late comers want a piece of the action, however, they can't stomach to buy a stock that has appreciated 50 or 100%, especially when those stocks are the higher quality leaders that have share prices of $20 or more, so the human habit of bargain hunting takes over and the cheap stocks come in to focus. Wall Street knows this, why else would they be accumulating them? Then the stocks see a huge price move, the buyer feels they finally got in on the market action until the bottom falls out of the C&D stock they bought, it's almost like a boiler room operation. Wall Street makes the quick money, the retail buyer thinks that these amazing gains will hold because the market or the industry group has had such an amazing run. The gains don't hold, many of these trades will take off and be over in a week.

If you have the stomach and risk management for it and you have the aptitude to understand that the chances are VERY high that the gains WILL NOT hold and as such, neither should you, then these stocks can offer some very nice returns. It is no coincidence that they are showing up in shipping and so far this morning, I've seen quite a few already moving in cheap biotechs.

Remember though, even if you don't trade them, being aware of a slew of these C&D trades all of the sudden coming to life is also a warning signal, at least fro my experience in the past. In effect, coffee is being served and those who understand that when that happens, it's a subtle way of the host telling you the party is over, enjoy the coffee and leave. Those who don't understand that subtle hint will likely stay past their welcome.