The Man Who Buys Crashespremise of his setup is that prices should quickly bounce off their
depressed crash levels as bargain hunters swoop in. If the bounce
hasn’t materialized, that may mean that the majority of the market
does not perceive value at these levels and further declines may
be in store. Therefore, a time stop as well as price stop could help
traders to minimize risk.
Best Trade Setup Is a Disconnect Between Fundamentals
and PriceDivergence is one of the most common setups in trading. Typi-
cally, divergence is traded off technical factors when momentum
indicators disagree with price action. However, Dana Allen likes to
trade divergence based on fundamental reasons. One of his favorite
trade setups occurs when a company reports superior earnings but
the stock sells off on profit taking. This is a very interesting strategy
because once again Allen positions himself on the side of value.
Once the wave of initial profit taking crests, and the selling is com-
pleted, the same stock can often present a compelling value as
long-term investors buoyed by strong fundamentals return to the
bid. The one exception to this setup is the biotech sector. Dana
feels that financial value of biotech stocks is extremely difficult to
gauge, given the fact most of these companies live or die by the
actions of the FDA’s Center for Drug Evaluation and Research
and have no assets aside from their intellectual property.