Tuesday 12/1/09. Tutorial Tuesday: What Happens After Stock Offerings?

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I released a new version of Patternz due to the bug I mentioned in yesterday's blog, that of 0 count totals for the chart pattern indicator. Holiday celebrating tripped it up.

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For the last month or so, I have been building a database of event patterns for common stock offerings. I started crunching the numbers a few days ago and I have some results to report.

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Let's take a look at Airtran (AAI) on the daily chart, shown.

On October 6, the company announced a public offering of 9 million shares of stock. The next day, the stock gapped open lower on the news and the company priced the stock at 5.08 per share.

The stock followed the usual pattern for such events by forming a U or J shaped bowl, bottoming at A and recovering to B. In this case, the stock tumbled then attempted a pullback in early November. Pullbacks occur 61% of the time after a downward breakout, by the way.

I was hoping this event pattern would be trabable for a quick 10% gain in two or three weeks. The thinking was to set a buy price a penny or two above the high each day until you buy the stock. If you used a 2 cent above the high buy stop, that would have gotten you in at 5.17, the day after it bottomed at A. Then you wait for price to rebound back to the close at C. For that to work, the rise at B needs to be higher.

How often does it work? Answer: 58% of the time. Yuck. If you buy in a penny above the lower high (a buy stop a penny above the lowest high each day until you buy in), and sell at the highest high before the trend changes, you can make 20.7%. That represents 153 perfect trades, but it gives you an idea of how much money you could make.

If you place a stop a penny below the low at A, use a buy stop a penny above the high, and exit when price reaches the close at C, you will be stopped out enough to lose 0.7%. If you wait for upward breakouts, meaning using a stop order a penny above the announement day's high, (upward and downward breakouts appear as blue lines on the chart), then you can make 1%. Place a stop a penny below the low, and exit when price reaches C.

How long does it take for price to recover back to C? The average is 29 days but the median is just 9 days. The difference is that a few stocks took a very long time to recover. Several stocks are too recent to have recovered yet, so the performance of this event pattern will improve as final results come in.

I hope to release more details on this even pattern soon.

-- Thomas Bulkowski