Tonight, SMB Capital’s Mike Bellafiore appeared on StocktwitsTV to talk about the optimal trading day and why it is important to define your optimal trading day. Click here to watch the clip. Mike appears on StocktwitsTV every Sunday at 8:30pm so be sure to tune each week to watch the show.

I wrote last week that the last week in August is historically uneventful. I went on StockTwits TV and said the same thing. I wrote in my blog “Vacation….Chop!” that you ought to take a break. I suggested that the last week in August or the first week in September are generally excellent weeks to vacation. I have some new information. Let’s discuss.

Steve has written many excellent blogs on Stocks In Play. Our trading philosophy as short term intraday traders is to find the stocks that are moving and use the trading set ups that work best with these stocks. The advantage of this strategy is that we can count on one hand the days that do not offer opportunity in a given year. To be more accurate we can count on one hand in the past three years the trading days that have not offered opportunity. And this past week, this week that has been traditionally slow was the best week we have had all year.

Huh? Bella did you just say that you guys had a killer week last week? But the market did not move. It was the last week of the trading summer. Everyone was on vacation working on everything not trading. Young traders were in the Hamptons hitting on the models (oh to be young again). Dads were catching up on important family time. People were having fun. People were not trading Bella. What the hell is wrong with you?

The huge advantage of trading Stocks In Play is that you only need one stock to be in play. Not only that but you need only one stock to be in play for a few days. And we saw that this week. We saw this with AIG. We saw this in the last twenty minutes into the Close on Wednesday, all day Thursday and again all day Friday. Our desk made some serious chops!

A favorite baseballism heard on a baseball broadcast is: “You see something new every time you come to the ballpark.” I went to the new Yankee Stadium on Tuesday and saw a grown man eat four sausage dogs in one sitting. Does that count? This week we again saw something new in the markets. A last week in August that offered memorable opportunity.

I had planned to take Tuesday through Friday off from trading this week and focus on my Partner business. And then came AIG in the last twenty minutes on Wednesday. I formulated a Plan B. Plan B was all day trading, all the time, in AIG. Good Plan B. GMan had planned a trip to Great Adventure for Friday with a mess of the guys. Trip Canceled. Profitable decision.

Like in professional basketball there are runs in our sport. There are days that can make your week. There are weeks that can make your month. There are months that can make your year. This August ‘09 was a month to make your year. If you missed it you may have missed the best trading of the year. And this is part of the huge disadvantage of what we do. You have to be connected to the markets and ready to cancel plans when tremendous trading opportunity visits.

Trade with an open mind at all times. Expect the unexpected. Just because every August I have ever traded was slow does not mean there would not be opportunity in my twelfth August of summer trading. And this is straight out of the ”Black Swan”. We overvalue what we know and undervalue what we do not know. Eleven straight years of a quiet last week in August does not mean this year will be similar.

Best of luck with your trading! Don’t forget to follow us on Twitter!

This Sunday on StockTwits TV at 8:30 PM I will be discussing an Optimal Trading Day.  I will discuss how some define an Optimal Trading Day, how not to define one, and offer a suggestion as to how to define an Optimal Trading Day.

What I mean by Optimal Trading Day is what is a great day for you.  What is the best day for you?  How do you define a perfect trading day for you?

Please share in this blog post and we will discuss on my Sunday night show.

Enjoy your weekend!

Gman, head trader at SMB Capital, wrote an excellent article for Wall Street Cheat Sheet about Reading the Tape. Gman discusses how learning this important skill helps traders determine the buying and selling pressure in a stock and also helps traders know when to load up in a position. You can read the full article here.

Mike Bellafiore, partner at SMB Capital, was cited yesterday in an article on TheStreet.com about the latest developments at AIG. You can read the full article here.

Don’t forget to follow us on Twitter!

A couple of days ago I received this inquiry via email from DH, one of our blog readers. It is a very interesting question so I thought I would share with all of you. Below is DH’s email:

“I read the SMB blog and watch the videos every chance I get and I
really enjoy them. Thanks for sharing!

I’m a fairly new trader and just started trying to learn how to read
the tape recently. I was looking at AIG today and the stock traded
above the important $35.00 level during the open. I went long at 35.05
as I saw the 35.00 level being hit but it was holding, and I was
hoping to ride a big move up. However, when 35.00 broke, I did not
exit because I did not want to get shaken out. My stop loss was at
$34.85 but before I could get out, the stock moved fast and I was down
about 30 cents on my trade.

My question is: When you are leaning on an important level for your
trade (35.00 in this case) and it gets broken, do you exit immediately
or do you wait and see? If you decide to wait and see, how do you
determine how much room to give the stock to move against you (5
cents, 10 cents, etc…)?”

Gman’s Comments now:

The reader is referring to the trading in AIG from last Monday. First let’s just put the play into contest. AIG had failed to get above $35 a couple of times in the last few days. The first time the stock failed there after a $5 point run in 20 minutes; $35 held the offer nicely. The second time the stock failed because there was serious selling at 34.95 and 35. so it was not like the buyers weren’t ready to buy above it – clearly the supply at that level was much greater than the demand. So $35 was setting up as the level to watch for another possible huge break. So great job by DH at identifying an excellent level in AIG.

Now when we prepare for a stock to break through an important level we consider a few possibilities on how the stock may break. One the stock could just drive up on the open, lift through $35 and not stop until $36+. Clearly the best and easiest way for people to be in it for the big move. You pay $35 and sell it when it stops up ticking a point higher. Can’t get easier than that. Chop.

But then what if the break is not clean? ideally we would like to see a few things for the breakout play to work:

1. We would like to see serious buying interest near $35. Say anywhere in the 34.60-.90 area.
2. When it gets near $35 you should see the bids getting hit for some size, dropping and see the stock not go down.
3. Once it starts to take $35 it should have a clean break and powerful break through it
4. If the $35 gets tested after popping above it, it should not drop more than a few cents through to shake the weak-hand longs. It is better if it just holds for size and never drops though.
5. It would be even better if when $35 lifts and pops that we see buying interest above it. Say 35.10 and higher.

Now coming into the open AIG was starting to hold 34.60 but the volume really wasn’t there yet. When the stock opened it popped through it without much of a fight. To me there was no buying on the bid, it was going up by people paying the offer; so it was starting to look like just a drive through the level. But the stock stopped printing aggressively on the offer near 35.3 and the last noticeable buyer was 70 cents away..uh oh..danger, danger, danger. And When the stock tested $35 on the way down it went powerfully through it into the 80s. Ripper.

So not only did it not drive just straight up a point but it also seemed like a huge fake break. The stock wasn’t showing signs of buying interest on the bid below, at or above the level; so we were skeptical. When the stock failed to drive up and it slowed we sold. Then the next and only place to buy the stock back was in front of $35 but you had to be out if $35 broke. You do so because you have not seen confirmation clues as the ones described above. Had we seen a few of those clues then we can restructure our trading plan to allow for a little wiggle room. But this just wasn’t the case for the way the stock traded last Monday. So there isn’t a magic number for how much room you can give the stock. It really does depend on how the play develops and where you are noticing clear buying near the level. Had we seen noticeable buying around 34.90 before lifting $35 then we woulld give the stock some room until we saw selling below 24.90. I hope that makes sense.

Will be watching this dopey stock tomorrow as it decided to pop in the last 10 minutes of the trading day today without me. Strictly going to be momentum trading this sucker so really have no levels to share at this time. But will tweet if we spot any.

Yesterday, SMB Capital’s Mike Bellafiore appeared on StocktwitsTV to talk about the importance of capitalizing on the opportunities that the Market presents. Click here to watch Part 1 and Part 2 of the show. Mike appears on StocktwitsTV every Sunday at 8:30pm so be sure to tune each week to watch the show.

Today after the Close we talked about vacation.  When to take it.  What to get out of it.  And why it is important.  Let’s discuss.

You cannot trade everyday.  You will burn out.   Your trading will suffer.  You will make less for the year if you do not take time to recharge as opposed to trading everyday.   Danny Lee on our desk would trade everyday if we let him. There are days after the Close on Fridays I know he is pissed that the markets will be closed the next day.  I just ordered him to take a vacation.  I learned in law school that you reach a point of diminishing returns.  At least this is what I allowed myself to think when I couldn’t understand some Federal Tax statutes.  But as a trader you must recharge.  And the weekends are not enough.

I take at least two vacations a year.  I would like to take four but I never get around to it.  This is the huge disadvantage of being a partner.  The last week in August, the XMas holidays, and when it is really cold in February/March are times I try and get away.  Usually I never make it happen for the XMas holiday.  Ripper.  But I should.

I like to find a nice beach for my vacation.  Long runs on the beach clear my head.  The sun beating down on me, sweat dripping, physically exhausted, with a perfect view of the water is just about as good as it gets for me.  Maybe this is because I grew up on the water in Long Island and this reminds me of simpler days.

I am very creative when I am away.  Some guys on our desk joke that I send them more work to do when I am on vacation then when in NYC.  This is accurate.  I think of different ways to trade and train.  I think of new ways for our business to grow.  And I clearly see what is important.  Before returning I create a mission statement for my trading and my trading business, my prop desk.  And as a result my trading and business improves.

We get so bogged down in details during the week.  Today I made ten phone calls, had seven meetings, wrote 50 emails, traded the open and close and it is still not 6PM.  And I still have to get my laundry, finish this blog, and finish a chapter for my book.  How can you think creatively in such an environment?  I spend too much of my time reacting and very little creating.  But getting away helps me refocus on what is most important and develop a plan that I can execute.

Also I just get tired without a vacation.  Lately I have not been sleeping well.  Each day is a physical struggle to survive. I could use, we all could use, a few days in a row where we catch 9 solid hours of sleep.  And my mind could use a break. All day long I challenge my brain to run as productively as it can.  At the end of most days my brain hurts from all the thought.  A week away to ask less of it is a good thing.

The last week in August historically is the best time to vacation.  Save the Open, generally you will not miss much.  And since you need a vacation and this is usually a slow week this is a great time to get away.  I never understand the young guys on our desk who take off the first week in August, or some time in July.  Those are not the times to take off.   But the last week in August and even the first week in September are historically reliable weeks to recharge without missing much market action.

If any are excited about where they are going on vacation, I hope you share with us.  For me it will be the Outerbanks.   A huge house on the ocean.  A pool (got to get some laps in), a desk overlooking the ocean (great reading location), a grill (marinated salmon), tennis (US Open season), golf (wait I thought I wanted to eliminate stress), and friends coming in and out for visits (those I don’t find annoying).  Now that is what I call a vacation……Chop!

I have been a regular contributor to CNBC’s Fast Money since April. While I enjoy doing the show and sharing my nuggets of wisdom, the format does not really allow me to fully explain my trading setups and thought process. Often, I only get a few seconds to explain a trade, that, if I was sitting down with someone one on one, would take several minutes to explain. Part of the issue is the show’s format, and the other part is that I need to be more concise. The guys on the desk kid me all the time that I love to talk. I’m working on getting better. That said, I am going to use this blog format to help explain and clarify some of my thoughts, trading setups, and trading techniques in more detail.

Last Monday, I appeared on the Fast Money Nighttime show to talk about Range plays. A Range play occurs when a stock trades between two well defined levels for a period of time. The top part of the range is resistance and the bottom is support. The range can be 10 cents, 50 cents, 1 point, 10 points, 50 points, etc. There are different range plays for different time periods: intraday, monthly, yearly, or multi-year. The Dow Jones sat in a range between 740 and 1000 from 1962-1982. That is 20 years!

So, why do I like range plays? First, they are a low risk, well-defined setup. You have specific entry and exit prices. You know exactly where you will get in and out of the position. Now, that doesn’t mean you have to buy all your shares exactly at the bottom of the range or short at the top. Personally, I like to scale into a position as it approaches the bottom or top part of the range. This way I have a position in case the stock does not trade exactly to my price. And, if you have tape reading skills, you can improve your entry and exit prices because you will be able to read the order flow. You can see if someone is aggressively selling at the bottom part of the range or buying at the top and determine whether the range is likely to break.

The key points to remember when trading Range plays are:

1 ) Always use stops. Managing your risk is key!
2 ) When the range breaks (at least for the moment) the range play is now void. Exit your position, and gather information.
3 ) Identify the type of market we are trading in: Are we in a trending market? Are we in a range-bound market?, etc.
4 ) Know the industry that the stock is in: Tech sector for IBM. Financials for JPM. By watching the other stocks in the sector you can get clues as to whether the stock is likely to break out of the range.

Range plays are just one trading setups that I use in my trading playbook. Range plays are around in all types of markets, and if you can master this play, it will add to your trading profits.

I have highlighted the Range plays that I talked about on Monday’s show. IBM: 116-120 and JPM 41-43. Please don’t hesitate to leave your comments on this blog or e-mail me if you have any questions.

Happy Trading!

Today, SMB Capital’s head trader “GMan” appeared on StockTwitsTV to discusses the market and stocks in play for the day. GMan also discussed why the algorithmic program “Buy the New Low” is flawed and will eventually be eliminated by the market. Watch the clip here.