The Law of Balance

The Law of Balance: Any sudden and large move in one direction must be balanced by a move in the opposite direction.

Stock trading seems to be a lot like physics. We all follow this rule implicitly when we trade but are there any guidelines that can be followed?

Not really, but I've developed one anyway since that is what I like to do, in my never-ending quest to find the most ideal stock trades. I'm sure Muddy laughs at me over this, as do probably several others.

My basic guideline is a stock becomes much more interesting when it has surpassed 5X ADR. That is, 5 times its average day range.

For instance, WRSP was such a great short twice this year because it normally trades in the range of ADR=8-12%. 5X ADR = 40-60%.  From 7/16 - 7/23 it ranged > 100% and from 9/18 - 9/25 it ranged > 250%. 

As you can infer, consistently high dayrangers have to become much more extended in order to become good candidates for likely moves in the opposite direction.  LCC ranges around 20-35% so 5X ADR = 100-175%. From 10/10 - 10/22 LCC moved 300%. It was a good shorting candidate at any point beyond 10/17 (and I posted it as a potential short on the blog first for 10/17). Notice how Muddy only put it on his short list after it was 300%. He has such an intuition for these things.