How to Play Upgrades
- From: larry.stocks2watch@xxxxxxxxx
- Date: 31 May 2006 11:34:46 -0700
A few years ago CNBC did a survey to see how upgrades affected stock
price. Their finding: An upgrade by a major firm tended to move the
price of a stock 3-5% percent higher in a fairly short period of time.
So upgrades can be good short-term trades. But they are sneaky animals
that can bite unless you do it right. One of the big mistakes that
traders make in an upgrade stock is choosing the wrong time to buy.
If a decent company gets an upgrade from a major player, that stock
will probably "gap up" that morning. Then the masses of people who
get that news a little after the open pile in, and the stock runs. The
true day traders jump in and out during the day and make impressive
profits
while the stock continues up. By late in the day the stock could be up
several points.
The action the next day is up to the short term players. Generally you
only get an upgrade on a good company. That means a lot of people have
bought the stock expecting to see it rise, and
when they see that stock rocket for 1-1/2 or 2 points they sometimes
can't resist the urge to capitalize on those profits. The next day
their orders are already in to sell at the open, and the stock can pull
back just as far as it gained the day of the upgrade. If the initial
run up wasn't
too dramatic, they sometimes hold for another day hoping for more
profits, and then sell it when it's up the second day.
Either way, there is usually a pullback, and that's the real time to
enter the stock if you are using a conventional brokerage. Time and
time again, as evidenced by CNBC's survey, the stock will start back up
and over the course of about a week or so will be up that 3-5%.
So the key to playing an upgrade is:
1) Make sure it is from a major firm ( Prudential, Goldman Sachs,
etc.).
2) If you have an instant-executions system and NASDAQ Level 2, have a
great day as the stock runs up.
3) If you are using a telephone broker or a regular online broker, be
very cautious but get in at around 10:30 a.m., and only if the stock is
at its high of the day. Plan to be out of the stock by 3 p.m.
4) If you missed the announcement day, jot down the company and wait
for it to pull back.
5) Enter the stock after it finishes its pullback and has posted one
good day to the upside.
If the stock is in a hot sector, it generally won't pull back until the
sector cools off. When you get an upgrade on one of those stocks, you
can attempt getting in at almost any time. Just watch closely so that
the sector doesn't turn south on you.
Finally, make sure you don't get trapped in some "fly by night" company
just because an analyst
says it "should" be trading higher. It pays off to use the upgrade
tactic only on established companies.
For a FREE report on HOW TO TRADE FAST:
http://lb.bcentral.com/ex/manage/subscriberprefs?customerid=12826
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