Chart Says This 650% Gainer is About to Crash
One of the coolest things about the stock market is that money can be made regardless of the direction of a stock. Many times, I have heard investors lament that they missed a sharp upward move.
Often, these same investors will commit the investing sin of chasing stocks that have made extreme short-term moves to the upside in the hope of momentum carrying shares even higher. While upward momentum can and does take stocks higher, more often than not, prices will quickly retrace the upward spike.
This leaves the stock chasers jumping from one hot stock to the next wondering why many of their investments are losers.
One solution to this dilemma is to learn how to short. Shorting allows investors to profit from downward moves in price. For those of you unfamiliar with shorting stocks, my StreetAuthority article on shorting biotech shares describes the method. The same tactic can be applied to any stock regardless of sector.
Simply stated, stocks that have spiked higher often drop in price. This is particularly true if the increase is due to questionable news, hype or other dubious reasons. Just like the stock chasers, short sellers scan the market for stocks that have soared higher in a short time frame.
Next, these rocketing stocks are researched to determine whether the move was warranted and will be sustained. Sometimes the move is in reaction to a real event, but the shares simply become overextended. Other times, the upward move will be due to hype or any number of questionable reasons. These are the ideal short candidates.
Keep in mind that stocks can simply keep climbing higher no matter how dubious the reasons. This is why stop-loss orders are critical when shorting.
I think InterCloud Systems (NASDAQ: ICLD) looks like an ideal short candidate of the overextended variety. Its share price recently spiked from a low of $2.20 to a high of $16.69 in just the past week. That’s a gain of more than 650%.
ICLD is a global provider of cloud, managed and professional consulting services for technology companies. It helps support the operation of enterprise, fiber optic, Ethernet and wireless networks. The stock moved from the OTC market to the Nasdaq on Oct. 31, after raising $5 million in a public stock offering.
A massively successful third quarter is what fueled the upward spike. The company reported that revenue increased by 448% to $16.2 million, gross profits hit $5.5 million, crushing the $1.2 million from a year ago, and net income was $0.26 per share compared to a loss of $2.16 per share in the third quarter of 2012. While these are compelling numbers, I think the share price increase is unsustainable, primarily due to the daily chart pattern.
Taking a look at the technical picture, the stock exhibits three gap moves higher to the $17 area prior to starting to collapse off the highs. This is a classic price exhaustion pattern that just begs to be shorted regardless of the fundamental numbers.
Recommended Trade Setup:
— Sell ICLD short at the market price
— Set stop-loss at $17.05
— Set initial price target at $5 for a potential 60% gain in 60 days