DAYTRADING: The Highs and the Woes
It was time for doc Kronkite’s second trading lesson. I left Dortmuder home with a plate of raspberry scones, the London Times and the Economist. The little guy seemed pleased. Dortmunder and the doc didn’t get along.
Both were brilliant. Dortmunder as a trader, the doc as a psychiatrist to traders.
They were the Hatfields and McCoys of the trading world.
The lovely Miss Tushbumper hugged me hard when I entered. I blushed.
As I walked in, the doc was on his lumpy leather couch, eager to begin the trading lesson.
Seeing that the little guy was not with me he said, “Where’s the little guy, Dootlegrunter. Don’t like him.”
“His name is Dortmunder doc, not Doodlegrunter,” I said.
“Right, that’s what I said, Doodlegrunter.”
“So what am I going to learn today?” Said the doc. “I’ve got those bull-flag patterns down pat.”
“I thought we might discuss uptrends and downtrends today,” I replied.”
“Trends, schmends,” he snorted. “I know all about ‘em.”
I shrugged, again.
“OK how ‘bout we work on gaps?”
“Gaps,” he said. “You mean like the Cumberland Gap? Nonsense. I know all about the Cumberland Gap. All the other gaps too. Learned about ‘em in high school.”
“No doc, not those kind of gaps. Gaps we see on stock charts.”
“Oh those. Know all I need to know,” he said. All gaps must be filled. Learned that from Mendelbaum the fund manager.”
“Medelbaum is wrong doc.”
“Mendelbaum is not wrong,” he hollered.
“Is too,” I yelled
“Is not,” he screamed.
I took a few deep breaths, made a fist, slammed it hard into my head. I felt better.
“Doc,” I began in a soft voice, “a gap is a wonderful thing to behold. Kinda like a Picasso, or a Mondrian even.”
“Don’t know them,” said the doc. “Who do they work for? Do they need a good psychiatrist? I may be able to fit them in.”
I shrugged once more. Took more deep breaths. My hyperventilation didn’t last long.
“A gap is an open space in a chart doc. It suggests, rather strongly, that there’s a sudden, inexplicable, extraordinary demand for a stock.”
“No,” cried the doc.
“Yes,” I said.
“Ah,” said Kronkite, “a gap is like a hole in your bucket.”
“A hole in your bucket!” he hollered, “a technical term I invented after treating all you crazy day-traders. Did a whole chapter on it in my book, “Day-Traders and other Fruitcakes.” You read it of course.””
“Gee doc, I must’ve missed that chapter,” I said, embarrassed.
“Listen carefully,” he said. “All day-traders are cuckoo. They all have holes in their buckets, deep psychological issues. Some suffer from sexual problems. You’ve heard of Premature Congratulations? A big problem with day-traders. Some have phobias: fear of bumping into elephants, very common; fear of being seated next to a Wall St. analyst at a dinner party or, even worse, being seated next to Larry King on an eight hour airplane flight. The list is endless.”
“Can we get back to gaps doc?” I asked.
“Yes, yes. Tell me more. More you should tell me,” the doc demanded, reaching for paper and pen.
“Ok doc. See, there are three kinds of gaps. Breakaway gaps, Continuation gaps and Exhaustion gaps. Shall we start with the Breakaway gap?” I asked.
“Yes, yes. Start already,” he screamed.
“Ok. Picture a stock that has dropped from 60 down to 6,” I began.
“I don’t have to picture them. I’ve got lots of them. Mendelbaum the fund manager put me into them,” he wailed.
“Ok, one of your six dollar stocks stops going down. It moves sideways between five and six for seven months on low volume. Got the picture?”
“I’ve got the picture and the stock. Proceed,” he said.
“Then one day this six dollar stock opens at 6 ½ on heavy volume. Suddenly there’s an open space on the chart, a gap. And the stock runs up to seven and closes near seven on very heavy volume. That’s a breakaway gap doc and it means that the probability is pretty good that the stock is going to run.”
“But Mendebaum says that all gaps must be filled. Won’t it drop to fill the gap?” asked the doc.
“No. When you see a breakaway gap, buy the stock. And it matters not what the company does, what they earn, how the analysts rate it. Just buy it,” I said.
He frowned. He sat up. He began to sweat. He started to hyperventilate. I waited. Presently he calmed down.
“Ok, so I’ll buy the breakaway gap. Then what?”
“Relax, a breakaway gap is whispering to you, “I look higher,”
“No kidding? Charts talk?”
“Indeed they do doc,” I told him.
“But there must be a reason for all this,” he said.
“There probably is a reason. But you won’t learn what it is until later, maybe much later. Meanwhile the stock may move up to eight, maybe nine,” I said.
“But if I buy it at seven and it goes to eight or nine, what’s the big deal?” he asked.
“Well, a move from seven to eight, one point, is a 14.2% move,” I said.
“Yes it is.
”Mendelbaum the fund manager never made me 14% in a whole year. I’ll strangle Mendelbaum is what I’ll do,” he screamed.
“And,” I continued, “if the stock moves up to nine your gain is 28.5%,” I pointed out.
“No!” he cried.
“Yes,” I said. “And then there may come a day when you see another gap. It’s called a continuation gap. That’s when more traders begin to take notice of the stock and begin to buy. Their buying tends to continue the prior trend, to make yet another gap, hence the name continuation gap.”
“This is amazing,” said the doc. “Who invented this, these flaps?”
“Gaps doc, not flaps.” Kronkite tended to slip into his malapropistic mode whenever he got excited. He was excited.
“Exactly, that’s what I said, flaps. I think it was Albert Epstein who invented these flaps. He was the guy who invented the Theory of Regularity. He won a Gobel prize for it. You could look it up.”
“I will doc, I will. At the earliest possible moment,” I assured him.
“Tell me more, more tell me,” he bellowed.
“Well doc, there will come a day when there’s another gap and the stock goes even higher. Then it begins to drop, and the gap is closed. That’s it doc, that’s the likely end to the move. We call it the exhaustion gap. It’s a signal, a strong signal to get out, exit, sell the stock. The stock is saying, “sell me.”
“Again with the talking stock,” he said. “Do you often hear voices?”
“All the time doc. The charts are always talking to me. Sometimes I listen; and when I do, trading profits tend to happen.”
“I’ll bet these gaps are all over the place,” the doc said.
“No, these gaps are not too common.”
“So how do I find these gaps?” he asked me.
“You have to look at charts doc.”
“No time. I’m too busy treating day-traders. Will you call me when you find a gap?”
“Fine. Ok, our time is up. I must prepare for my next session, a day-trader named Plugger. Another session or two, he’ll be completely cured. See Miss Tushbumper on your way out. Another appointment make for next week.”
Copyright Oct. 2002