Recovery plays are always higher-risk, and while a stock may be closer to $0 than it once was, it can still fall 100% from your entry level. However, there still seems to be some appeal to traders and investors in search of “a good deal.” Be sure you know what you’re getting into when that’s your aim, because as one stock just proved, cheap stocks often get cheaper!
As a trader, I pay very close attention to the recent history of a stock’s behavior. Sure, there are occasional surprises, but stocks which make steady moves tend to keep doing the same. And stocks which have a history of large price gaps are usually prone to more big gaps in the future.
Take ADLR for example. Back in September, the stock lost 52% overnight! Then it cratered again in November, losing 39% overnight. Ouch!
[1] (Click for full size.) Chart Courtesy of TeleChart [2].But it gets worse….
On Tuesday of this week, the stock did virtually the same thing. After closing on Monday at 8.72, it shed 56% overnight.
[3] (Click for full size.) Chart Courtesy of TeleChart [2].The lesson here is to avoid stocks with an ugly history [4]! If you dare venture into a stock hoping for a recovery, consider taking a smaller sized position because these rebound plays are far more speculative and you’ll want a lot less of them in the event of a disaster.
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com [5]
[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]