Peak plays are very short term in nature and you have to be prepared to get in and get out very quickly. There are several reasons for Peak Plays, some of which are: rumors, earnings forecasts or reports, mergers, upgrades, merger speculation, stock splits and sometimes they occur for no noticable reason at all.
There are basically two ways to play a peak: a pullback and the peak itself.
Peak Plays
If there is still alot of pressure built up and you are fast, you can partake of the run up. If you feel the peak will hold for a quick play, get in at the open. If you are more of a risk taker, you can place your order before the open or if you are more conservative, then wait out the first 30 minutes of trading to verify the move. Often a stock that has a peak that continues for a second day will experience a small pullback at the open and then will reverse and continue up. One stategy is to place a limit order before the open at the closing ask price from the previous day.
Since this is the second day of the peak, you want to get in and out on the same day (maybe, even within an hour). More than likely the stock will top and pullback very soon. Always know your exit before you buy (Wade Cook) and once your buy order is filled, immediately place a limit order to sell ( this may be for a little as 1/4 to 1/8 of a point ). The biggest play on a peak occurs with the pullback, so if you are going to ride the peak, you have to do it quickly, this is not the time to get greedy! And remember if you cannot afford the stock, look to see if it has call options, probably at least two months out.
The Pullback Play
This is an easier play and the one that is used most often because the time frame is longer. A general rule for the biggest peaks is: the quicker and bigger the run up, the quicker and bigger the pullback.
On some peaks it will take a session or two before the pullback starts. The big question here is "when will the peak hit its top or will it even top out"? Sometimes the peak is just a quick move for a stock that turns into a rocket. Generally, if we are going to see a pullback, it will happen slower than the run up did. One way to help determine if the stock is reaching a top is to observe the volume. Look for a return to more normal trading volume with little or no upward price movement. And please don't get greedy, you are not always going to hit the very top of the peak, if you try to do so, you risk not getting in on a quick pullback, you must be in position to participate.
Sometimes the pullback will occur the following morning of the peak, but more often we see it continue on for part of the following morning. If you can watch the stock, wait until it hits a resistance point and then open a short position (don't forget put options). What if you cannot watch the stock? Simple, enter a limit order for your short position to be hit a little below where it's currently trading. This way you avoid opening a position until the stock has definitely moved into the pullback.
You should not expect the pullback to give back more than half of the peak because this does not happen often, especially if the stock has been trending upward over a longer period. To ensure a solid return in a shorter time frame, don't look for more than a 25% pullback from the original peak. By following this guideline you can move on to compound your money in another play.
What if you feel there is a larger, more gradual pullback coming? Then watch the openings very closely, if you see the stock opening above the previous days close, you should give serious consideration to buying to cover.
Here are a couple of clues to give you more of an advantage. Look at the chart on the evening of the peak. Look to see if the stock hit a price significantly higher than the closing price, if it did, this may be an early sign of a pullback. The second thing you should look at is a one year chart of your stock. Try to determine if it has been stuck in a range over the last month or two, if it has, look to see how many other times over the last year it had been in this support/resistance level. If it has visited this area several times before and also exhibits the first sign mentioned at the beginning of this paragraph, you have a great indication of a pullback coming!
Get in and get out quickly!
And keep in mind that on a pure peak play you are going to have a shorter window of opportunity (usually a one day play), the opening of the following morning is very critical and you cannot get greedy.
For the pullback play you are looking at a time frame of from two days to a month, keep an eye open for a return to more normal volume and price plateauing (these are topping signs) and don't look for more than a 50% pullback from the original peak (be happy with 25% or less).
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