ARIA - The Good News "Gap And Go"

There was good news out on ARIA before the bell, and it was trading in pre-market around BID: 2.05...ASK 2.06 when I looked at it, up about 18%.

Excerpt:

"July 27 (Reuters) - Ariad Pharmaceuticals Inc (ARIA.O) said preliminary results from an early-stage trial of an investigational compound has shown significant activity in patients with advanced blood cancers, who were resistant to other drugs, triggering a 50 percent rise in its shares. Of the 23 chronic myeloid leukemia (CML) patients in the four highest dosing groups, 19 remain on study without disease progression, evidence of control of their disease, Ariad said."

"Good news" isn't always good news for a stock. Like POOL's earnings in yesterday's post, what is important is the market's REACTION to the good news (or earnings, in the case of POOL). The reaction in pre-market to ARIA's good news was pretty good, so I looked at the chart to see if I could find an entry long.

The BID: 2.05...ASK: 2.06 trading in pre-market was a gap above TWO recent highs: 1.83 and 1.93, so I viewed that as a bit rich for an entry long, but I also didn't expect much of a pullback. Maybe a gap fill of the 1.93 high, so I put in an order at 1.97 with a target near 2.20 horizontal resistance. A gap fill of that 1.93 high turned out to be the exact low on the session.

In addition to the fact that the market actually was reacting to the news as "good news" in pre-market, another reason that I didn't expect much pullback was the heavy short interest in the stock, like POOL had when it released its earnings last week.

Any opening in ARIA above 1.93 is a "Take No Prisoners" opening that often is "just for openers," and it causes panic in the shorts, who have to BUY to cover. The additional buying from longs (like me) creates a lot of upside pressure. "Buying begets buying."

I sold my shares ahead of my 2.20 target when the stock was up 25% on the session, but ARIA had a good bit more in it, rallying to 2.60 and closing out the session at 2.45 on 7,900,000 shares, which was 27 times average daily volume, and twice the amount of short interest in the stock. Whew!

Suggestion: When you see a stock gapping out of a pattern, like POOL, or gapping above resistance, like ARIA, check out short interest. No guarantees, of course, that it won't end up being a "Gap And Crap" opening, where the stock opens near its high, then fizzles, but a heavy amount of shorts are your best friend in a situation like that. They're forced to become buyers, unless they want to get their clocks cleaned ;)

Gain: $1,000.