Stock Trading Education - Trading tactics & examples

Slam Plays

The Slam screen looks for stocks experiencing a significant drop in price. Playing Slams requires constant vigilance and quick response time. There are a number of ways Slams can be played: Short Term Bounce, Continuation, Pullback with Support, and Recovery. All Slam plays have more than average risk, but the Pullback with Support and Continuation plays are less risky.

The common screening criteria among the four plays are a price drop. For all but the Pullback play, you'll want to screen for at least an 8% drop. Slam days also have abnormally high volume. To ensure that you're looking at stocks with good liquidity, screen for more than your normal volume requirement.

Possible Reasons for Slams:

• Pre-announce lower than expected earnings
• Missing earnings estimates
• Bad news for a company in the industry or for the overall sector
• Lower projected demand for company's goods and services
• Overreaction to bad news for the broader markets
• Analyst downgrade
• Reaction to a quick, unsustainable upside move
• Perception that stock will be affected by foreign market actions
• Sometimes just about any reason or no reason at all

Potential Entry and Exit Points for Continuation Slam Play

The continuation Slams that just keep going and going are good downside moves. They have two common traits: after the initial Slam, their price drops are typically more gradual and consistent, and they typically have greater difficulty rising above their 10-Day Moving Average (MA) line. Some of the best Continuation Plays start as mild Slams - one-day losses of 8% or less.

Potential Entry Points
Screen for stocks crossing down through their 10-Day MA line with a one-day price change of at least -8%, and average volume of at least 100,000. Notice how much of the bar (the trading day's range) is below the 10-Day MA line on the day it crosses down. If 80% or more of the bar is still above the line, you may want to wait one more day to confirm the move down to avoid a short play on a stock that might bounce up off its 10-Day MA.

Potential Exit Points
As always, "if you've made enough, get out" is a simple rule to follow. But sometimes you can leave a lot on the table or lose a lot of money quickly. So if you want to consider a more mechanical and less subjective exit, consider using the reverse of what got you into the play: a cross up through the 10-Day MA line. Again look at what percentage of the bar is above the line on the day it makes its bullish crossover. You don't want to get wiggled out of a position prematurely. Consider creating a 10-Day MA bullish crossover Alert to be prompted for your exit.

Charting Example for Continuation Slam Play

As just described, the best Continuation Slams are typically "mild" first day Slams, but they just keep going. Notice how Abacus Direct (ABDR) plays down a bit more every day and never can seriously challenge its 10-Day Moving Average line. During the period shown, ABDR gave up $14 or 31% in a month, and continued to move down.

Entry and Exit Points for the Pullback with Support Play

The Pullback play is essentially a reversal play on a smaller Slam. These are typically strong stocks that are either pulling back and resting before a further move up, or pulling back on some poorly received news or other market condition. The support part of the equation is the 10-Day Moving Average (MA) line, which may act as a springboard for the stock as it pulls back to this support level.

Potential Entry Points
Screen for stocks crossing down through their 10-Day MA line with a one-day price change of at least -8%, and average volume of at least 100,000. Notice how much of the bar is below the 10-Day MA line on the day it crosses down. This play is a reversal of the Slam, so the smaller the amount of the bar below the line the better. To ensure you consider only the strongest candidates, you may want to add a "MACD Bull is equal to Yes" to your screen. Consider confirming the reversal by waiting for at least one day's action completely above the 10-Day MA line before you take a long position - you can also automate the process by creating an Alert.

Potential Exit Points
As always, "when you've made enough, get out" is a simple rule to follow. But sometimes you can leave a lot on the table or lose a lot of money quickly. So if you want to consider a more mechanical and less subjective exit, create a 10-Day MA crossing down Alert as a prompt for your exit. You could also use a trailing stop loss order as your exit, based on your risk tolerance.

Charting Example for the Pullback with Support Play

The Pullback play can be a good "value" play as you are typically picking up a relatively strong issue on a dip. At the time of this writing, Yahoo! (YHOO) could be considered a good candidate for the Pullback play. It closed just touching its 10-Day Moving Average (MA) line. The 10-Day MA has proved to be a very reliable support for YHOO all year as it has bounced back every time it touched the line.

Potential Entry and Exit Points for the Slam Recovery Play

This is the rarest bird of all the Slam plays. It's a commonly held theory that stocks moving down a lot in one day usually do so on an overreaction. However, stocks making a big one-day move down often do so based on a consensus belief that the stock has lost value. And it is more common for the downward pressure to continue, than for it to reverse.

Potential Entry Points
Screen for stocks crossing down through their 10-Day Moving Average (MA) line, a one-day price change of at least -8%, average volume of at least 100,000, and stocks above their 50-Day MA line. Let risk tolerance be your guide as to whether you take a long position immediately, or wait a day or two to confirm upward movement. You may want to wait until the stock moves back up through its 10-Day MA line.

Potential Exit Points
As always, "when you've made enough, get out" is simple rule to follow. To lock in profit while letting a stock run, consider using a trailing stop loss order a safe distance below the stock's average daily trading range that is consistent with your risk tolerance and your objectives.

Charting Example for the Slam Recovery Play

Earthlink (ELNK) recovered nicely from an 11.5% Slam during the period thanks to a strong move in its sector. Three days after the Slam, ELNK punches back up through its 10-Day Moving Average line. Seven days after the Slam, ELNK had not only recovered, but improved by 48%. A rare but impressive recovery.

Entry and Exit Points for Short Term Slam Play

This is the rarest bird of all the Slam plays. It's true that stocks moving down a lot in one day usually do so on an overreaction. However, stocks making a big one-day move down often do so based on a consensus belief that the stock has lost value. And it is more common for the downward pressure to continue, than for it to reverse.

Potential Entry Points
You'll have to find these plays searching for day's "Winners/Losers" to see which stocks on each of the exchanges are good candidates for the Short Term Slam play. Stocks having lost 15% or more from the previous day's close are what we're looking for - typically the bigger the drop the better for this play. But, you still have to be very selective. The best candidates for this play open with a big price drop, run down a bit lower, start to build a base at the low, and climb slowly for the rest of the day.

Potential Exit Points
The critical point in exiting any short term play is to exit before the end of the day - even if you're in a losing position. This is the most sacred rule of short term trading. It is difficult to predict the next day's action in a Slam play, and it's even more difficult to predict if the Slam has turned out to be a positive Short Term Slam play. Many times the stock heads lower again, and you could sustain huge losses by holding over night. Set a specific gain you're looking for (consider 1/2 point or 5% profit) and get out if and when it's reached. Alternatively, you can watch the momentum and jump out when it dies.

Charting Example for the Short Term Slam Play

Two things made Beyond.com (BYND) a good candidate for a Short Term Slam play, in the period shown. It opened just below its 10-Day Moving Average giving it a support level to leverage against. It also gapped down a huge 42% from the previous day's close making it an even better candidate for the Short Term Slam play. After running down just ¼ point from its open, BYND crept up the rest of the day, closing up $4 ½ from its open.

Summary

• Slams are high risk and high maintenance plays
• Continuation and Pullback with Support Slams are more conservative plays but still contain risk
• Find out what caused the Slam and carefully assess the damage
• Use the 10-Day Moving Average as your divining rod
• Slams that blow through their 10-Day MA aren't likely coming back any time soon